The investment climate is slowly improving for Mexican IT startups, but is still nowhere near as conducive as in the US. Mexico needs investors who can offer management advice as well as money, and who are comfortable with the risks involved in true “venture” capital. Entrepreneurs must understand they need to deliver results before they start drawing big paychecks.
Local experts agreed that obtaining funding in Mexico is more challenging than in the US or other nations with an established base of entrepreneurs and investors. Software companies and manufacturing firms are, however, getting more funding than hardware companies, mostly in the form of seed funding used for work such as market research and product development, said Yamin Ruiz, chairman of Proteus International, a strategic business development consulting firm.
“(IT) startups need endorsements from universities, certain capabilities as a team and good leaders in order to reach funds,” said Ruiz.
One experienced biotech entrepreneur based in Guadalajara, who declined to be named, said while there is a lot of money in Mexico, it is difficult for high tech entrepreneurs to find a fund tailored to their specific needs.
Francisco Ramos, founder/CEO of Guadalajara-based digital marketing agency Black Swan, said investors are not solely to blame for the funding difficulties. “It also has to do with a lack of sophistication of the entrepreneurs themselves,” he said. “Sometimes, they feel like they should be highly compensated, and they also don’t understand they can’t make a great salary and also get money from investors. They’ve got to risk everything they have in that new company.”
“It’s not nice to see an unprepared entrepreneur coming into the room to raise capital and see him or her not understanding rounds of investment, achievement of milestones with these investments, ownership and other fundamental topics that will affect his project, his dreams, and his private finances in the long term,” said the biotech entrepreneur.
There was a general agreement that the Mexican VC community is simply not as large, established or mature as in places like Silicon Valley. Ruiz noted there are very few Mexican private equity firms to accelerate investments, while Ramos said investors from the U.S. who visited Guadalajara “were impressed, but said the further you go from Silicon Valley, the harder it is to pull money into the companies.”
“Mexican VCs need to become more sophisticated, and to specialize their knowledge in specific industries,” said the biotech entrepreneur. “So often in Mexico, you will find VC groups that will invest in all sorts of companies that sound attractive to them, based on trust with the entrepreneur they are investing in, which is a must in any VC-entrepreneur relationship, but not the only thing.”
However, she credited Mexican VCs for learning more about sustainable investment strategies, and also for trying to do more to add value to startups beyond simply infusing cash.
“We need investors who understand the industry” and can give a start-up management advice along with funding, said Ruy Cervantes, a graduate student at the University of California-Irvine who is doing a study of the IT ecosystem in the city and is active in several local start-up organizations. Traditional investors in Mexico “are not really venture, they are just capitalists,” putting their money in relatively safe sectors such as real estate. “But this is changing, and fast,” he said, with the creation of several local venture funds.
Government Starts to See Big Picture
Ruiz said the Mexican government has offered funding of between $500 USD (in the form of loans) and as much as $200,000 USD in venture capital or grants. But for startups, he points out, a $500 loan is not even enough to register a company, much less fund its growth.
Ramos cautioned that while he and his peers maintain good relationships with government funding agencies, they often “work by their own rules and have their own agenda,” and are not as nimble as the emerging networks of startups. While government funding has helped some startups, it takes longer to secure than private funding, and is most available to companies that already have a product or at least know what they want to offer, says Cervantes.
Meanwhile, the anonymous entrepreneur said that almost any high tech company in Mexico can get government seed money of about $7,500 USD, but “usually these funds are highly coordinated and controlled by incubators, and there is little flexibility on what you are allowed to do with this money.”
“With every successful fund received and used by the entrepreneur…the trust from the government grows more and entrepreneurs will get access to more ambitious funds, with more flexibility,” she said. If the startup fails to deliver, “you lose trust, and second chances are hard to get.”
This article was originally published in Global Delivery Report