Startup Boom in Mexico Driven by Foreign Founders, Capital

Having watched the startup ecosystem evolve and shapeshift over the last five years in Mexico, a lot of the change is being driven by foreign entrepreneurs and capital. It started early with the Linio Mafia, many of whom were recruited from abroad, as documented by Endeavor’s study into the long-term success generated by the Rocket Internet company. But Linio was just the initial spark to a movement that has been growing rapidly here in Mexico. 

Above all, foreign capital has been leading the charge. About 90 percent of Mexican startups are self-financed by entrepreneurs themselves for the first three years, as reported by the Mexicans Entrepreneurs Associated (ASEM). The best way of remedying this now is through foreign venture capital.

Prior to 2016, the number of foreign VCs leading investments in Mexican companies was nearly non-existent, with only five deals led by a foreign VC that year, according to Crunchbase. Since 2019, the number of deals led by foreign VCs has grown exponentially, despite the pandemic, with 89 rounds led by foreign VCs into Mexican companies. It’s important to remember though that these numbers still pale in comparison to the US, where almost 2,000 deals were done in 2020 in Silicon Valley alone. We’re just starting to scratch the surface of the potential in Mexico.

We should also start to see median check sizes grow in the short term, as companies begin to reap the rewards of those initial investments into larger growth rounds. While we’re still only two months into 2021, the median deal amount is way up so far.

That’s not to say that foreign capital is better positioned to understand the market than the local players, but the expectations and valuations are typically much larger, for better or worse. Foreign VCs will have to continue to develop their expertise in the market over time, but it’s important to have them invested in Mexico’s success. 

Raising over Zoom appears to be contributing to a diversification away from just Silicon Valley, according to some of the recent trends. In Mexico in 2020, more than half the deals were led by foreign VCs, but the actual number is probably much higher. This is because many deals don’t include an official lead investor since they are often being raised via Convertible Notes and SAFEs. 

Overall, combining the knowledge that foreign VCs have of scale-up-sized businesses, the amount of capital they provide, and the growing confidence and experience they now have in Latin America is leading to an explosion in the number and quality of deals in Mexico.

On the entrepreneur side, Mexico is an exciting market to get started in. There’s a lot to like, from culture, to climate, to price. Many of those ingredients are what lured people to Silicon Valley in the first place but its appeal has faded a bit over the years.

While there are no concrete numbers on how many foreign founders are in Mexico, a cursory glance over the same deals analyzed earlier revealed a foreign founder or cofounder in almost one in five of the deals.

Being a foreigner in any country can have its challenges but there are now lots of other ex-pats around in the entrepreneurial scene. Simultaneously, the ecosystem in Mexico is much smaller than Silicon Valley’s, making it truly feel more like a community. Mexicans themselves also happen to be one of the most welcoming cultures to foreigners in the world. There’s even a term widely used for this, malinchismo, which describes the preference for foreign products, companies and people.

Mexico hasn’t traditionally had talent from companies like Google, Apple, and Facebook to pull from, but it has developed its own talent in larger more traditional corporations. Much of that talent, made up of both locals and foreigners alike, has begun to flock to the startup scene largely because of the influx of funding. Tech driven companies with large local offices like Uber, Oyo, Rappi, Amazon are leading the way by bringing in talent both locally and from abroad to form the next generation of great Latam startup founders. 

There are now more opportunities for Mexican and foreign entrepreneurs alike to both start a company and work in one. The market is ripe and the talent is there to create the next generation of the Linio Mafia.