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After four years riding the roller coaster ups and downs of running an internet startup in Latin America, I feel that I have paid my duties in the race of chasing the Latin American dream. There are hard facts that any entrepreneur in pursuit of this sort of dream should be well aware of before jumping in.
If you look at a continent and you see no more than ten big hitters, you need to be a little suspicious. This lack of a sprawling scene of tech leaders could be the result of many different things, such as immaturity of the market, low internet penetration, lack of trust on ecommerce and a very important one: lack of risk capital or even worse, all of them at the same time. This seems to be the particular case of Latin America over the past five years.
The few exceptional companies that made it were those that were created from outside the region with seed capital and growth capital from institutional investors in the United States (or Germany), which is no coincidence.
If we take a look at Brazil, Mexico, Argentina, Chile, Colombia and Peru starting out five years ago, there wasn’t that much in terms of funding for startups, but the good news is that over the last two years we have seen an increase in the number of accelerators.
Nowadays, there are approximately three or four per country; all of them invest in the range of US$20 000 to US$50 000. It’s clear that $100K that can be raised by any startup will not last long on their race to conquer the Latin American Dream — Mercadolibre started with a business plan and US$5-million and Despegar with a business plan and US$1-million.
For the purpose of this study, let’s assume that company X will raise US$250 000 to develop a product without any pivot or problems (hardly likely) and will find a way to scale the product and it will feel that it is in a great possibility to raise an A round from a Venture Capitalist (VC). This part is called the Valley of Dead: because of the reasons I mentioned before related to market immaturity or luck of trust. It will be hard to achieve a decent turnover for a VC to consider you, particularly with that initial funding.
According to Ernst & Young, nearly 80% of the local entrepreneurs surveyed describe having access to funding in Brazil as difficult. The same report found that 63% of entrepreneurs want to see more programmes on education, funding and profile-raising would help to encourage an entrepreneurial culture.
The reports suggests that greater tax incentives for investments into small business stand out as the leading area where government support could make the greatest impact on funding.
But if you find it possible to raise capital, and after all the hard work you get to a revenue range between US$25 000 and US$30 000, there will be really few VCs in Latin America that will want to do a seed round. And when I say few I mean less than five, which makes your odds really hard if you think that an average American VC make one investment for every 300 hundred companies. Maybe in Latin America it is one in a hundred, but still your chances are low.
Once you have the money you will start dealing more closely with the other problems described above, which are more related to immature markets itself. You will also need to understand that you’ll have to build international connections because your odds of raising finance locally are very low.
My conclusion is that there is a real huge opportunity to create massive businesses, wealth, employment and role models for the upcoming generations and that is because of the market inefficiencies in terms of capital and the market itself. But — there always is one — to make it happen is really hard. However, because of the 588 million people on this side of the world, it is really worth the challenge.
In the end, it is all about to PROOF (Perseverance, resilience, obstinacy, obsession and faith) to yourself and others that you have what it takes to make it work, no matter how hard or how long it takes.
Image by Diego Torres Silvestre via Flickr