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CHAPTER 2

Why Now

A set of powerful forces are driving and will continue to drive the growth of Tecnolatinas: low entry barriers, access to large regional and global markets and a pool of quality talent, a growing interest in entrepreneurship as a career option, increasingly friendly and better funded ecosystems, inspiring success stories and the growth of new opportunity spaces driven by the rise of new technologies.

Only a decade ago, most entrepreneurs in Latin America had major disadvantages relative to their peers in Silicon Valley. They had limited visibility on market trends; Internet penetration in the region was very low; starting a business required millions of dollars, and funding was unavailable.  Today, they can create a global startup with less than US$10,000, access capital like never before, and instantly reach billions of connected consumers.

Global invention and entrepreneurship are being democratized. The playing field has never been so leveled and large. Today entrepreneurs and inventors from Latin America have access to almost the same information, tools and customers than their peers elsewhere.

The cost and time required to test new concepts and to build and scale a startup have fallen dramatically. The regional and global playing field is becoming flatter than ever before. Only a few years ago, starting an Internet company required a minimum investment of US$1M in servers and equipment. Today, a host of cloud services enable any team with a bright idea and a few thousand dollars to build and scale a born-global company at exponential speeds without needing major capital expenditures. They can also outsource the design of their products to armies of freelancers from around the world via sites like Freelancer, 99Designs or Workana.

The cost of acquiring clients has also fallen thanks to social media. The cost of accessing innovation-enabling technologies such as 3D printers (for rapid prototyping), laser cutters and biotech lab equipment is also falling, opening new doors and even enabling DIY innovation. Instead of spending years building factories, startups like Bluesmart are quickly outsourcing their production to Chinese factories, and their logistics to Amazon. At the same time, they are leveraging social media, shared assets, communities and platforms to scale their businesses overnight.

Tecnolatinas have instant access to vast markets and are not constrained by the size of their home country. They can choose to focus on Latin America, a region with almost 400 million Internet users. And they can also choose to be born global and target other regions from the start, like OLX, Bluesmart or Satellogic. App markets, for example, provide.

E-commerce is sizable and growing. App markets provide access to extensive markets at the touch of a button to startups like Etermax, an Argentine gaming company that created apps like Apalabrado, a company that reached a global audience of 60 million people in only a few years, and now has annual revenues of more than US$150 million. New markets are developing at an accelerated pace.

Startups are creating value at record speeds.  Relatively new companies like Uber, Snapchat, Oculus Rift or Whatsapp, achieved valuations in excess of US$1B in less than two years, which is ten times faster than the pace of the most successful traditional companies in the past. Every month for more than 100 months, a new startup has achieved a US$1B valuation.

These valuations are still uncommon in the region, but talented youth are watching these success stories and realizing they can repeat them and transform an idea into a successful business that will contribute to make the world a better place.

Entrepreneurship is becoming the preferred career option for top talent with business and engineering backgrounds. This is partly because the value creation upside can be life changing. There are plenty of successful entrepreneurs quickly reaping fortunes. But also because the overall career proposition is better aligned with the values, aspirations and preferences of the Millennials. This new generation aged 20-35 wants to learn, flexible hours and upside in the value they are creating. They open to change.

The regional ecosystem is evolving, making it easier for new entrepreneurs to succeed. Some countries already have several generations of successful entrepreneurs who provide role models and are ready to help those coming up the ranks.

A network of institutions (notably, Endeavor) provide coaching, financial support and improved access to the international business community. Venture capital funds, angel investor networks, crowdfunding sites and accelerators are growing rapidly, providing new funding options and gradually covering capital needs from seed to growth stage.

Collaborative working spaces are providing flexible office space, tools and supporting communities. A growing host of conferences, hackathons, startup weekends and courses targeted to new entrepreneurs are weaving the fabric of the ecosystem. The notion of networking goes beyond the idea of social or professional relationship. Service providers are developing and transferring know-how.

Governments are increasingly aware that startups are a vital force for the development of the information economy and of an ever growing array of new positions and jobs. They are beginning to support them with capital, grants, improved business environments and special incentives. Most people fail to realize the magnitude of the phenomenon and its strategic implications. But it’s undeniable that with appropriate support and steering, the Tecnolatinas can become the dynamo the region needs to generate a future of abundance.

The bubble issue

Our view is that the growth of the Tecnolatinas ecosystem may have ups and downs but is here to stay. The combination of driven and talented entrepreneurs, low entry barriers, massive opportunities for disruption, scalable business models and increasingly supportive ecosystems is explosive. We believe we are in the very early stages of a positive revolution and the best is yet to come.

The untapped potential is clearly huge. Consider that, despite recent accelerated growth, Latin American startups raised only US$0.6B in 2015 versus the US$3.6B raised in the same period by startups in Israel, a country with a population of only 8 million people (vs. roughly 600 million in LatAm).  The clear implication here is that Israel is investing 400 times more on a per capita basis than countries in Latin America are. Can’t part of this gap be closed? Our region spends US$28 billion in R&D every year and hires hundreds of thousands of researchers. What would happen if we changed mindset and inspired these scientists and engineers to create startups and connect with entrepreneurs?

Some skepticism may be expected – not at all unreasonable. Low global interest rates, cash availability and stories of quick astronomical valuations create an incentive for market entry and potential capital misallocation. The lion’s share of technology startups in the region are also copycats from US models, making their claim to value more fragile. Finally, most of the companies are very young and will require investment and support to make it through the valley of death. A global financial crisis or a significant market correction that shifts sentiment towards risk and cuts access to fresh capital would likely result in a carnage.

But the fundamentals for long-term value creation are stronger than ever. The cost of launching a technology startup in LatAm has come down by more than an order of magnitude. The Internet has grown from 40 million users to more than 3.3 billion and is expected to grow by another 2-3 billion in the next ten years. Time spent on the Internet grew from 2.7 hours in 2008 to 5.7 hours in 2016 and US e-commerce and adspend multiplied by over 15 times since 1999 and still has plenty of room to grow with only 6% of US retail revenue penetration. In LatAm, e-commerce went from essentially nothing in 1999 to over US$70B in 2015. And there is huge space for value creation as mobile penetration continues to grow and startups begin to enter in rapidly growing disruptive technology spaces such as augmented and virtual reality, artificial intelligence and robotics, the Internet of Things and synthetic biology.

Differently from the 1990s, when it was common to see LatAm startups focused on local plays, today most players target regional or global markets from the outset, particularly when born outside Brazil. The ecosystem around technology companies is much better developed, with accelerators, venture capital funds, budding makerspaces, collaborative hubs and government support programs.

There are also more potential exit options, including well-capitalized US players and stronger regional capital markets. Links with Silicon Valley have proliferated, with local subsidiaries of US internet giants like Google and venture capital firms like Accel Partners and Redpoint; with the presence of Latin entrepreneurs in the US, and thanks to regular missions in both directions supported by organizations like 500 Startups, SV Link, universities like DiTella, FIESP, TechBA, ITESM and even governments.

Finally, many Tecnolatinas have better fundamentals than those of LatAm traditional companies. They are attackers with disruptive and scalable business models supported by exponential technologies. They are focused on large and rapidly growing markets. They are lean, agile and unencumbered by legacy. They leverage state-of-the-art tools and business practices. They are attracting and motivating the dynamic young talent coming out of universities with their epic, flat organizations and value-driven incentive systems.

 

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