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Analysis

Mexico Shows Promise as Startup Hub, Unicorn Incubator

By Miriam Bello | Sat, 01/15/2022 - 13:37

The growing number of startups that could become unicorns highlight Mexico’s attractiveness as an entrepreneurial hub. Big capital and tech development are among the perks available in the country but more remains to be done in terms of inclusion and getting greater individual buy-in on data-sharing for Mexico to live up to its potential, say experts.

“This is a game with a long-term vision. We have to remember that we are creating value and transforming lives in the long term through better companies. What is exciting today is not just a round announcement, it is that we are succeeding in creating products and services that transform lives and bring better solutions to market,” says Fernando Lelo de Larrea H., Partner at ALLVP.

The entrepreneurial ecosystem is not a work of magic, Vincent Speranza, Managing Director and Latin America Regional Adviser for Endeavor Mexico, told MBN. In the first decade of the 2000s, this ecosystem in Mexico was only focused on retail, food and beverages and family businesses, with no public policy, little female participation and no technology. “This became a great opportunity because we needed to close the gap that was created in that period,” Speranza says. Since around 2017, however, innovation and technology have taken root. To date, Mexico has 394 startups just in the fintech sector, compared to 2017 when there were 230 companies.

One of the country’s first milestones was the first round of capital raising that exceeded US$100 million, organized by Mexican fintech startup Clip in 2019 and led by Softbank. “This made international funds look at Mexico for the first time. This was a validation of the value of the market in the country and opened a window for other (companies),” Speranza says.

Kavak would become the first Mexican unicorn after reaching a valuation of US$1.15 billion in its 2020 funding round. The SoftBank-backed used-car buying and selling platform has raised more than US$400 million in total since its founding in 2016. Later, in early May 2021, Bitso raised US$250 million in a Series C investment, bringing its valuation to US$2.2 billion to become the first crypto unicorn in Latin America. “The growth of the cryptocurrency ecosystem this year has been remarkable. It took Bitso six years to reach its first million customers. Now, a year later, we have reached 2 million,” says Adriana Villaseñor, the company’s Corporate Development Lead.

In a sure sign of growth, Mexico has even overtaken Brazil as the region’s startup development hub. Fintech will continue to thrive in this ecosystem. According to Mexico’s Fintech Radar, the number of players in this sector has grown at a yearly average rate of 23 percent. This high growth is fueled by the greater adoption of tech and new digital solutions during these unprecedented times, adds Gerry Giacomán Colyer, CEO and Founder of Clara. According to Liliana Reyes, Director General, AMEXCAP, this is largely due to the trust that investors, both national and international, have placed in local ventures like Kavak and Clip. These companies are now valued at around US$8.7 billion and US$1 billion, respectively.

Mexico’s startup ecosystem has also resulted in significant liquidity availability. These circumstances have created an environment where innovative startups excel. “Due to the pandemic, the digital economy is formalizing rapidly. Digital startups benefit greatly from this development,” says Diego Serebrisky, Co-Founder and Managing Partner of Dalus Capital.

But the digital transformation is not the only advantage that Mexico offers. Urbanization, internet access and technology usage enhance its attractiveness, adds Deepak Chhugani, Founder and CEO of Nuvocargo. Moreover, the region’s higher-education enrollment is increasing, with a 55.7 percent rate for the current school cycle against 52.4 percent for the 2019-2020 cycle, according to INEGI.

Another positive change is Mexico’s technological adoption. The use of technology has evolved from a luxury to a need and states like Jalisco, Nuevo Leon and Mexico City already see it as a governmental priority. These three states have created ministries for innovation and tech to boost the use and development of tech, making it available for social, educational, scientific and economic purposes. Jalisco’s Ministry of Innovation, Science and Technology, for example, seeks to insert Jalisco into the economy of the future through the promotion of innovation, science, technology and higher education. Through this action plan, the state has become “The Mexican Silicon Valley.

Mexico has shown remarkable entrepreneurial solidity, especially considering that it was during the pandemic that all Mexican unicorns were born. These innovative companies are capable of reaching extraordinary levels of growth, backed by private capital that provides smart money (resources and advice), explains Reyes. “We are witnessing how international VCs and growth funds are participating in the subsequent investment rounds of companies that obtained their first investments from Mexican funds.”

Opportunities for Future Unicorns

Fintechs, in particular, are introducing new technology to one of the largest and arguably the most strategic sectors in the economy: financial services. In turn, this is leading to further financial inclusion opportunities. For instance, Bitso’s use of cryptocurrencies has helped to bridge gaps in financial inclusion and according to Javier Martínez, the company’s Chief Product Officer, opportunities remain. “Beyond speculative purposes, specific use cases for cryptocurrencies in Latin America can address many of the rigidities and weaknesses found in the region’s traditional banking system.”

Inclusion will play a key role in the development of the fintech ecosystem. “Almost all funding is 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,” explains Pablo Ricaud Arriola, President of Rising Farms. The industry urgently needs to start working on growing the country evenly to decentralize opportunities and reach every state. “We need a catalyst in the form of funds or sophisticated angel investors,” Ricaud says. These can filter proposals, while educating and guiding entrepreneurs in the right direction. They can provide not only financing but also mentorship, strategic guidance, network access and other support.

Mexico is just starting to see its first unicorns pop up and Nick Grassi, Co-CEO of Finerio Connect believes the country is ripe to support many more ventures. “What we are not seeing is all the unicorns that would be enabled with a more robust public priority of encouraging users to share their data and encouraging those who do not create paper trails to do so because of the benefits it creates,” Grassi says.

If startups, and especially Mexico’s strongest fintechs, could convince even 10 percent of the estimated 25.6 million Mexican workers in the informal sector of the benefits of data-sharing, they could bring over 2.5 million new people into the financial services sector, according to Grassi. “This would be a huge boom toward financial inclusion. Startups, regulators and traditional financing institutions have to start showing consumers that their data can be safely shared and that it is worth doing because it will save them money and give them access to new products.”

The data used in this article was sourced from:  
MBN, Finnovista, INEGI
Miriam Bello Miriam Bello Senior Journalist and Industry Analyst