How Will US Elections Impact the Startup Ecosystem in Mexico?By Nick Grassi | Tue, 11/24/2020 - 13:54
After a long wait, the election is over and Joe Biden will be the next President of the United States. More than 75 million people voted in favor of the president-elect in the highest voter turnout in over a century.
Assuming that the results hold, we’ll be entering into a new era of American foreign policy, as the “America First” policy pushed by Donald Trump gives way to its more traditional “leader of the free world” philosophy. A recovery is in the making in 2021 with the stock market rising on the news of a Biden presidency and Pfizer’s success in creating a COVID vaccine that is 90% effective. While COVID briefly pushed issues like the importance of manufacturing key medicines, medical supplies and other essentials locally, the world is still very much globalized and if anything, the West’s movement away from China has given Latin America, and Mexico in particular, a key opportunity.
Not many realize that Mexico is in the Top 10 in the world in its number of engineering graduates. It graduates more engineers overall than countries like Canada, Germany and Brazil. Not every engineer is going to be ready to found a startup or contribute to the ecosystem, but the foundations in math and science give Mexico a tremendous leg up in the competitive global ecosystem.
“So far from God, so close to the United States” has always carried a negative connotation but the reality is that being next to the largest consumer market in the world and in the same time-zones have serious benefits when it comes to “nearshoring,” a hugely important tendency only likely to be bolstered in the post-COVID world. A Biden presidency would mean much more outreach to US allies, less protectionism, and is unlikely to reverse the decoupling between China and the US. The same economic forces that brought nearly a billion people out of poverty in China may be looking for a new home.
Therein lies the great opportunity that Mexico has to begin to explore its unique position in the world, as both a major domestic market with almost 130 million consumers but also as the geographically rich, and talented, yet affordable (usually four to five times less expensive than the US) neighbor of the largest economic power in the world. This is Mexico’s time to shine.
Traditionally, capital has been one of the principal problems when it comes to the startup and small-business ecosystem in Mexico. Finally, U.S. and foreign venture capital is taking notice of Mexico’s market opportunity. While they still have a lot to learn about the market, it hasn’t gone unnoticed that global leaders in the industry are making larger bets on Mexico and are making them much more frequently than just a year ago. While the previous government had admirable ambitions through INADEM and its funds to power startups and accelerators, it was time to make the transition to more private capital sources, and that has grown at just the right pace to take the baton from the government and take it much farther. COVID has also allowed more startups than ever to go completely remote, allowing for talent to drive hiring decisions and not necessarily location.
There are many different ways that countries can successfully develop their economies; there isn’t one single “right” answer. We’ve seen Asian countries like Singapore and South Korea develop rapidly through state support mixed with economic incentives for international corporations. We’ve also seen Israel take a different approach through its military training programs and its cultural penchant for risk-taking.
While Mexico’s approach will be unique, the best thing it can do right now is to position itself as a long-term partner to the US to leverage its massive talent base and try to keep it in Mexico. The brain drain of talent has affected Mexico for too long but the domestic employment and growth opportunities have never been better right now, between large international startups and a great homegrown ecosystem. Not only that, but Mexico is beginning to attract international founder and engineering talent, from Europe, the US, Asia and other Latin American countries. The first unicorn in Mexico, Kavak, was founded by foreigners from Venezuela, for instance.
How Mexico takes advantage of this situation is going to be key to its success in the next four to eight years. Overall, Mexico needs to improve its global image by keeping its immense talent in Mexico and continue to attract more foreign direct investment by tightening its grip on national security and the rule of law.
While VC is up, it’s still not even close to the levels of Brazilian VC investment, with Mexico receiving US$558 million while Brazil saw $US2.7 billion in 2019. Government cutbacks won’t help the ecosystem in the short term, and the new administration doesn’t seem overly interested in promoting startups or innovation in general. Lastly, the ecosystem is truly missing liquidity events to help attract more private capital and VC, as we saw a huge outpouring of excitement for Africa’s startup ecosystem after Stripe’s acquisition of Paystack just last month for $US200 million. But many of these issues are very fixable, and some will resolve themselves within a matter of time.
Overall, the cards are stacked in Mexico’s favor and the winds sweeping the global dynamics of a China-US schism can be masterfully handled here. The only question is, how will Mexico seize the moment?