Subject: Why Amazon And Entrepreneurs Are Bullish On Mexico | TechCrunch
From: "Eric Schwerin" <[email-masked]>
To: "Jeff Cooper" <[email-masked]>
Cc: "Hunter Biden" <[email-masked]>
Date: Sat, 25 Jul 2015 12:12:07 -0400

Why Amazon And Entrepreneurs Are Bullish On Mexico | TechCrunch

http://techcrunch.com/2015/07/24/mexico-is-the-land-of-emerging-entrepreneurs-and-opportunities/

Why Amazon And Entrepreneurs Are Bullish On Mexico

Imagine a country with 100 million mobile phones, but just 15 percent of
residents have a credit card. A country where more than half of the
population is under age 27, but less than half has Internet access. That,
in a nutshell, underscores the opportunities and challenges for innovators
and investors evaluating Mexico’s emerging innovation economy.

To get a first-hand look, Silicon Valley Bank <http://www.svb.com/> in June
organized a trip to Mexico City for two dozen U.S. and Latin American
investors to meet with some of the nation’s leading entrepreneurs and
investors, as well as government and university officials.

There is a lot happening to justify the growing confidence of U.S. and
international investors in the fledgling innovation sector of Latin
America’s second-largest economy.

While Brazil’s tech ecosystem dwarfs that of Mexico, we found an energized
and developing Mexican sector primarily focused on Internet infrastructure,
mobile communications, e-commerce, financial services and education.

The stable Mexican economy is fueling overall growth, and technology
companies are bolstered by a burgeoning middle class in addition to the
youth-centric population primed to go mobile. And while doing business for
foreigners (and natives) still can be challenging, the government in recent
years has implemented key legal and financial system reforms.
Healthy Increases In Venture Fundraising And Investing

Venture fundraising and deal making is growing, with support from
the Mexican government and international groups for entrepreneurship.

The Latin American Private Equity & Venture Capital Association
<http://www.lavca.org/> (LAVCA), a co-sponsor of the trip along with
Endeavor, issues a business-friendly scorecard for Latin American nations,
with a focus on private equity and VC funds. It ranks Mexico third, behind
Chile and Brazil.

LAVCA reports that in 2014, fund managers invested US$1.31 billion in
49 Mexican deals, the second-most active Latin American country after
Brazil. That represented a 102 percent increase over 2013 in capital
deployed and a 63 percent increase in the number of deals.

The storyline we heard in Mexico reflected hope and high expectations. Here
are my observations of the opportunities and challenges.
Opportunities: E-commerce, Fintech And Telecom In Demand

Mexico may lag in terms of Internet access and online purchasing, but we
are seeing signs of change. Amazon in late June began selling physical
goods and introduced third-party marketplaces in Mexico, calling the event
its biggest international launch ever.

Although Mexico has other online marketplaces, such as Rocket
Internet-backed leader Linio <http://www.linio.com/home.php>, the push by
Amazon is a timely test of Mexican consumers’ appetite for online shopping.
The hope is Amazon’s investment and market know-how will grow the overall
e-commerce industry.

Mexican entrepreneurs, U.S.-trained ones who have headed back to their
native home, and foreign entrepreneurs, mostly from other parts of Latin
America, are attracting funding with a heavy focus on information
technology and financial services. According to LAVCA
<http://lavca.org/research-and-tools-2/industry-data/>, 49 percent of VC
investments made between 2011 and 2014, measured by amount invested, were
in information technology, followed by 22 percent in financial services.

We heard from several startups about how they are extending financial
services to the huge swath of the population that is essentially unbanked
or underbanked. Kueski <https://kueski.com/?lang=en> co-founder and CEO
Adalberto Flores, who had worked for U.S. tech companies for a number of
years, has set up the country’s first online-only consumer lending platform
in his hometown of Guadalajara. Kueski, which specializes in micro-loans up
to USD$450, launched its algorithm-driven lending platform in January 2013.
To date, Kueski, an SVB client, has made tens of thousands of loans through
its platform.

Flores told us the lack of formalized banking, even for the middle-class,
presents an enormous opportunity in Mexico and much of Latin
America. Kueski has raised $3.75 million in funding from top investors,
including U.S.-based Core Ventures Group, CrunchFund, Sobrato Family and
Ariel Poler, for which Kueski marked their first Latin American
investments. CrunchFund partner Patrick Gallagher joined the company’s
board of directors, in what is a rare example of a brand name U.S. VC
joining the board of a Mexican startup.

Mexican and international incubators and accelerators, including 500
Startups and Wayra <http://wayra.co/>, are active promoting entrepreneurs,
while the Mexican seed and early-stage VC markets are getting a boost from
two dozen new seed funds partially supported by Mexico’s National Institute
of Entrepreneurship <https://www.inadem.gob.mx/> (INADEM).

SVB chose to go to Mexico now because we wanted to see what’s happening at
this formative stage, even if it’s still challenging to find
immediate opportunities and navigate local industry, financial and legal
practices.
Challenges: Low Appetite For Risk, Modernizing Business Practices

For many investors, it still may be too early: There are few examples of
strong IPO or private sale exits. Local managers seldom co-invest, which
can hamstring entrepreneurs’ access to capital at key times. Mexican angel
investors can’t deduct investment losses against gains, a key benefit in
the U.S.

And for everything in between, gaps in staged financing create some concern
among foreign VCs about the burdens they may face to support companies
through their life stages, as local funds don’t have the size to keep going.

The Mexican government has initiated reforms in recent years, such as
liberalizing stock ownership rules and promoting the public listing of
companies, but much of the country’s wealth is controlled by affluent
families. Of those companies traded on the Mexican stock exchange, we were
told that 40 percent are still functionally privately held by the founding
families. When acting as investors, this control-mentality is very much
present.

While the skilled workforce is growing, one Mexican entrepreneur told us
that his top engineering team is based in the Bay Area, not Mexico. There
are more than 100,000 engineering graduates each year, but the top ones
typically are recruited by U.S. tech giants or choose Mexican
multi-national companies. Few are going to startups, a reflection of a
low-risk appetite that seems to persist.

Still, we definitely felt the energy and impending cultural shift to adopt
technology and reward entrepreneurship, with a goal of finding solutions to
some of the country’s toughest challenges.

From the point of view of U.S. and Latin American investors on the
trip, Mexico may present challenges for funding, operating and scaling
businesses. But most of us left Mexico City eager to share
the opportunities we now see.
Featured Image: Jesus Cervantes
<http://www.shutterstock.com/gallery-241411p1.html>/Shutterstock
<http://www.shutterstock.com>

Eric D. Schwerin
[email-masked]

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