Toward a Promising but Challenging Future for VC in Mexico

The VC ecosystem in Mexico has come a long way in the last two decades, marking a path full of innovations, challenges, and opportunities for both entrepreneurs and investors. In the early 2000s, the ecosystem was in its early stages of development, investment in startups was minimal, and the infrastructure to support entrepreneurship was almost nonexistent. However, public and private initiatives emerged to establish the foundations for sustained growth.

The creation of VC funds and the facilitation of access to financing have been determining factors for the sustained growth of the ecosystem, since currently the capital invested in Mexican startups amounts to US$9.4 billion, with a notable concentration of investment in the last five years, which represents 88% of the historical investment. Therefore, Mexico has a strong position as a relevant player in the global VC landscape.

In the past 20 years, more than 1,400 companies have received VC investment that has generated at least 287,000 formal jobs, representing over 3% of the total new formal jobs in Mexico. Between 2021 and 2023, VC and PE funds supported more than 550 companies, contributing to the creation of 14,000 new jobs.

These figures show the crucial role of VC to boost the economy and to generate job opportunities, particularly in the small and medium-sized enterprise (SME) sector. Investment trends; the impact of VC on job creation and to identify areas of opportunity for new investments as well as what fund managers need to approach investors are key factors to outline strategies that allow fostering and strengthening the innovation and entrepreneurial ecosystem.

A Year of Contrasts

We can define 2023 as a diversified year regarding the sector where VC funds tend to invest. We can see that investments in tech startups continued to show dynamism, in sectors such as fintech, edtech and healthtech, showing new opportunities offered by the Mexican market. The preference for these specific sectors is not a surprise, given their potential growth and the need for innovation in order to improve efficiency, accessibility, and quality of life for users.

The same year, over US$15 million was raised by the Mexican VC industry, representing 18% of the total new vehicles created by the whole private equity industry in the country. That underlines the growing interest and consolidation of the Mexican VC ecosystem, reaching an investment in Mexican startups of just over US$623.7 million. However, the global macroeconomic environment had an impact on the investment decision of some funds that chose to be more cautious, hence slowing the pace of new investments and focusing on consolidating their current portfolios. That adjustment created a more challenging environment for entrepreneurs seeking financing.

The past year highlights the resilience and growth of the industry, especially in the tech sector. The key to the future lies in continuing to support innovation, diversifying funding sources, and promoting a more equitable geographic distribution of invested capital. That approach will allow Mexico to recover from current contractions and position itself as a regional leader in entrepreneurship and technological development.

Key Factors for Future Growth

The future of venture capital to continue supporting the development of startups and entrepreneurs in Mexico is linked to many factors that will determine growth and sustainability. The country's macroeconomic and political environment is key, since the stability of both would generate the confidence needed to attract investments. Another key element is public policy and the supporting programs aimed to foster innovation, competitiveness, and transparency. Finally, trade agreements and a strong, well-designed strategy to promote Mexico as an ideal destination for international investment are crucial to facilitate the opening of new markets. The attraction of more investors is essential to strengthen the entrepreneurial ecosystem.

Furthermore, the development and consolidation of the VC ecosystem in Mexico will be achieved largely with government collaboration and a favorable regulatory framework. Experience with the National Entrepreneur Institute (INADEM) demonstrates the importance of a similar entity to promote its development. The quality of available talent is another critical factor for the success of the entrepreneurial ecosystem, so investing in specialized education and training is crucial to prepare graduates for market challenges and contribute to the growth of startups.

Fostering a solid entrepreneurial culture, where failure is seen as a learning opportunity, is vital for the growth of the ecosystem. It can be achieved through educational programs, incubators, accelerators, and the promotion of success stories that inspire new entrepreneurs. Education and training are essential for the development of a robust ecosystem, for entrepreneurs with initiatives that strengthen technical and soft skills, and for training programs for business management.

Investment Trends

At the VC level in Mexico, investment trends are increasingly leaning toward tech and sustainable sectors. Fintech stands out as a solid option, opening opportunities for financial inclusion and banking digitalization, while edtech is experiencing significant growth after the pandemic, revealing the need for innovative solutions in education. Health and biotechnology are also gaining relevance, driven by the urgency to improve access to health services and the efficiency of the health system, taking advantage of the renewed attention generated by the health crisis.

Additionally, investment in clean and sustainable technologies is on the rise, reflecting growing concerns about climate change. Renewable energy, waste management and sustainable agricultural technologies emerge as key areas of interest. These sectors not only offer environmentally responsible solutions, but also represent significant economic opportunities in a global context increasingly oriented toward sustainability.

In terms of investment preferences, fintech, information and communication technologies, as well as healthcare and biotechnology are areas of great interest, attracting both domestic and international investors.

Challenges and Opportunities

Although it would be difficult to list them all, we can say that the most relevant challenges for the ecosystem are the lack of diversity and inclusion when it comes to distribution of capital, but each one also presents a range of perspectives to consider.

Access to capital remains an obstacle for many startups, particularly in early stages, despite growth in capital availability. Hence, the creation of new specialized investment vehicles and the simplification of access to financing processes, together with the diversification of financing options, such as venture debt, could expand opportunities for entrepreneurs.

On the other hand, unlocking social potential through specific initiatives aimed at supporting women entrepreneurs and startups in less developed areas with the promotion of inclusion and equity, especially in terms of gender and regions, would mean extending the reach of VC and the investment opportunities it represents. Furthermore, we must consider that sustainability and social responsibility are beginning to emerge as important trends, with VC funds turning to see initiatives with environmental and social impact as new business and growth opportunities.

On the other hand, Mexico has ample potential thanks to its geographical location, its internal market and its human talent. Sectors such as technology and digitalization, renewable energy and agrotech offer significant opportunities for growth and innovation. The transition toward a more sustainable economy and the application of advanced technologies in key sectors can boost the country's economic and social development in the coming years.

The VC ecosystem in Mexico has come a long way, marked by significant advances and notable achievements. However, this journey is far from over. On the contrary, it still has vast potential to explore and harness. It is crucial to recognize that government support plays a critical role in fostering this ecosystem. The creation of favorable public policies that promote innovation, competitiveness, and equity is essential to guarantee an environment conducive to the growth of startups.

There's a bright future on the way as long as momentum is solid and challenges are addressed strategically and collaboratively. With the support of authorities, favorable public policies, greater inclusion and diversity, as well as a renewed focus on innovation and access to capital, Mexico is well positioned to establish itself as a leader in the VC ecosystem of Latin America and beyond. It's an exciting time for Mexican startups, which have the talent and creativity necessary to transform the economy and generate a positive social impact in the country and the world.

Liliana Reyes is CEO of the Mexican Association of PE and VC funds, AMEXCAP, a prominent leader in the financial and development industry. She has worked in project evaluation, technical assistance and design, as well as development and administration of projects with international financial organizations. She actively contributes to various boards and committees, and is an influential figure committed to economic development and innovation in Mexico. Her continued leadership has left a significant mark in the financial and entrepreneurship arenas.