How Entrepreneurship Dies in Mexico’s Medium-Sized CitiesBy Pablo Ricaud Arriola | Thu, 01/21/2021 - 13:12
“Fantasy is the impossible made probable. Science fiction is the improbable made possible” – Rod Sterling.
Entrepreneurship is considered an important driver of economic growth because it contributes to the creation of new jobs, new employment opportunities, the emergence of new innovations, but also to the stimulation of competition and competitiveness. The link between entrepreneurship and economic growth is shown when entrepreneurs act upon profit opportunities and in the process, make the economy more productive by creating more economic activities that invariably generate employment opportunities and boost gross domestic product.
Small and medium enterprises (SMEs) are the main developing force of the developed market economies. SMEs provide the catalyst for technological and industrial take-off and economic growth. Without doubt, entrepreneurship has the potency and drive to accelerate economic growth and development.
In developing countries like Mexico, factors responsible for the slow growth of entrepreneurship and the lack of innovative spirit include our faulty education system, no incentives or environment to innovate, the lack of proactive government policies, and the most important in my view: access to capital.
For the past five years, Mexico has seen a dramatic rise in risk capital allocation, both from local and international sources. This has been tremendously good for the ecosystem and has evolved into great innovation and a rising entrepreneurial class that is striving for more and finding ways to get there.
The problem is that funding is almost completely concentrated in Mexico City, with the remaining chunk going to Guadalajara and Monterrey, leaving medium-large cities like Queretaro, Merida, Oaxaca and Leon dry. I am not saying that funds and investors are not keen to invest in these geographies, they usually do if the opportunity is in front of them; the hiccup is that the sample of entrepreneurs that are sophisticated enough to access them is egregiously small. Stanford MBAs know where the capital is, no matter where they live, but what happens with the good ideas of great entrepreneurs who don’t have the same access or opportunities and just need more guidance?
The matter is made worse when you consider that institutional venture capital in Mexico usually rallies around trends and the most “innovative” industries, mimicking US funds and leaving the more traditional ones with only one option: friends and family. If you don’t have those kinds of friends or family, you are in for a big fight. It would be easier if we all just jumped onto the fintech bandwagon. I’m talking from experience. I’ve been lucky (and stubborn) enough to access the right people, sometimes in the tightest of frames to make funding work in a traditional industry, while not under the cover of the cherished Ivy League MBA.
Regarding the traditional funding options, aka banks and other credit institutions, there’s zero chance for a startup to get funded by them. This is not hyperbole. Banks, and their “fintech” counterparts – mostly lenders with a cool webpage and exactly the same process of a bank or worse – ask for years of financial information and existence that these startups and entrepreneurs simply do not have. If by a miracle you do have it, chances are they’ll hit you with the dinosaur Mexican special requirement: 2:1 real estate guarantee for the loan. That is an impossible requirement for the absolute majority of aspiring entrepreneurs. Nonexistent, like I said.
This is why in these places, most of their ideas die. I can’t blame them. It’s not that people shy away from the battle, or the uphill climb, it’s difficult to start the climb when you don’t know there even is a hill.
The solution is attainable with more engagement on both ends – more investors engaging outside the “hubs,” and more entrepreneurs engaging in the ecosystem that has united to accelerate their growth. That puts growth and prosperity within our own sphere of control.
How to Start?
In these geographies, capital is concentrated disproportionally in safe-seeming investments, like real estate. It’s like dying of thirst while a gigantic glacier (of capital) is frozen in front of you in the form of real estate. There is money, lots of it. Lack of sophistication on both ends is to blame.
On one side, most aspiring entrepreneurs are not equipped with the right tools to structure business ideas in the right way or present them in an adequate format that makes sense for the very few venturing investors out there. On the other end is the capital in the form of big industrialist empresarios and families that fail to understand the kind of risks associated with these investments, or the right way to look at them, creating an environment of the blind leading the blind. If I don’t understand how an investment works, or see its potential, and moreover, the only ones I see are dimly lit and make no sense, you bet my hard-earned cash is going to the real estate mattress.
What those environments need are catalysts that channel both sides in the form of entities like funds or sophisticated angel investors. These can filter the opportunities and understand the risk in the stead of those people with capital, and also educate and guide the entrepreneurs in the right direction. They can provide not only financing but also mentorship, strategic guidance, network access, and other support.
We urgently need to start working to create these catalysts for the country to grow together, to decentralize, for opportunity to reach far and wide. Is not the greatest opportunity the one that nobody focuses on? Imagine having a front row seat to every and all the best ideas in these mid-sized cities that are falling right through the industry’s net. Those, I would argue, are the vast majority and the only thing they need is a little guidance, a little light.
Reality usually follows what our mind is certain is bound to happen. What if people, and therefore our collective society, knew that tools are available for us to create, to aspire to more? Escaping the rat race. A compounding effect causing people to release their minds because there is a chance that if I do it right, I no longer have to merely survive or hate what I do. I can flourish. Possibility is powerful.