Turning ideas into businesses: Encouraging creativity and providing new ways to access the market

On the back of repeated years of economic growth, more and more Mexicans are taking advantage of the macroeconomic stability and sizeable domestic market to create new businesses. An assortment of start-ups has been popping up across the country, especially in places like Guadalajara, Monterrey, Tijuana and within the populous Mexico City, the country’s capital.

While it is estimated that 600,000 companies have been established over the last five years, 80% of start-ups fail within the first two years Lack of sufficient funding is one of the major challenges.

GOVERNMENT SUPPORT: As a way to promote the development of new companies, the federal government created the new National Institute for Entrepreneurship (Instituto Nacional del Empreendedor, INADEM) in 2013. Working under the Ministry of Economy, INADEM aims to support entrepreneurs and small firms at different stages of development. Financial support will be channelled through the National Entrepreneurship Fund, although the institute also aims to improve management skills, another challenge that sometimes sinks budding business owners.

For 2014 the National Entrepreneurship Fund has announced it will grant MXN9.4bn ($728.5m) to be distributed over 24 bids. The fund is targeted at small and medium-sized enterprises (SMEs), but it also allows universities and government institutions to apply for funding, as long as the projects have the aim of creating new businesses. Other grant programmes, such as the Programme for the Development of the Software Industry, are aimed at solidifying new IT businesses with cash grants for new equipment and certification.

The creation of INADEM comes at a time when legal changes are also helping to create a supportive environment for start-ups. An intellectual property bill is expected to be approved in 2014, allowing Mexican entrepreneurs and researchers to be able to claim ownership of patented work that is done with funding from the government. This will encourage more scientific research to be directed towards meeting market needs.

FUNDING: For entrepreneurs who do not come from a research background, difficulty in sourcing financing can be a major deterrence to growth. In Ernst & Young’s “G20 Entrepreneurship Barometer 2013”, Mexico was ranked 18th out of all the G20 countries in terms of access to financing for entrepreneurs. According to the report, 75% of start-ups still get financing from government grants and other types of public aid. Bank loans and venture capital account for 43% and 42% of entrepreneur financing, respectively.

On a smaller scale, private equity and business angels are also used as sources of financing by 29% and 24% of start-ups, respectively. The large amount of private entrepreneurial activity that is still dependant on government programmes for funding might be a reflection of previous instability in Mexico’s economic cycles. This likely also accounts for the relatively low penetration of the banking sector as a source of financing for new businesses. However, with average bank financing rates going down over recent years, it is expected that the private banking sector might get a bigger slice of this segment in the future.

Diversified funding for new ventures is coming from a growing array of governmental instruments. In 2012 a new MXN300m ($23.3m) seed fund was set up by the federal government, in cooperation with Nacional Financiera, a state-owned development bank that assists in the expansion of SMEs. The new seed fund is being used to co-fund projects for new companies or businesses. Economic growth will bring more liquidity into the market, which means that the role of venture capital firms and independent business angels in supporting company creation will likely increase.

Government mechanisms and recent regulatory changes are creating the right economic incentives. In addition to the intellectual property bill, constitutional reforms are opening up competition in sectors that have traditionally generated inflated profits. A more competitive economy overall will ensure that funding for research and innovation follows the most useful ideas.