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Monday, May 6, 2013
Special Reports

Latin America: Technology Revolution?

Is the Latin American technology sector ready for an entrepreneurial revolution?

LATINVEX SPECIAL
Knowledge@Wharton  

In 2011, four college friends decided to create a search website that would provide discounts, bargains and benefits for those users who had one or more credit cards or debit cards. They gave birth to Skonto, which became the first Argentine application to take part in Store, the Microsoft software shop for Windows 8. Thus far, the founders – including marketing students Diego Verzino and Federico Del Pup, and two students specializing in computer science -- have depended on support from UADE, the Argentine business school, but they are working to ensure that the business will eventually pay for itself.

Skonto is one of several technology companies that have been emerging all across the region in recent times. According to some experts, the trend indicates that the sector is poised for a revolution. Last October, The Economist took note of that phenomenon when it published an article entitled, “The Lure of Chilecon Valley.” That piece highlighted the public policies of the country, exemplified by Start-Up Chile, an initiative established in 2010 with the goal of attracting technology talent and creating a Silicon Valley on a small scale.

“Basically, the initiative involves the Chilean government co-investing with local investors in a non-recoverable fund,” notes Paris de l’Etraz, director of the IE Business School’s Venture Lab. The goal of the fund is to incubate the development and growth of start-up companies. The state-owned entity provides 90% of the funds for developing the group, up to the level of US$40,000 per company. “But it does not try to become an investor; it only wants to help local companies grow. If an entrepreneur arrives with references, and is qualified, [the fund] assumes part of the investment,” notes De l’Etraz. Thanks to this initiative, which requires entrepreneurs to stay in the country for at least seven months, Chile is taking the lead in the region when it comes to entrepreneurial initiatives.

Nevertheless, comparisons with Silicon Valley can be exaggerated, adds De l’Etraz, who just attended several “Venture Days” in Latin America, during which start-ups presented themselves to audiences of local and international investors. “People believe that Silicon Valley is something that can easily be replicated, but its entrepreneurial ecosystem is quite special.” In his view, the most outstanding thing [about Silicon Valley] is that its angel investors have previous experience as entrepreneurs and, as a result, they “recognize the entrepreneurial mentality; they can identify an entrepreneurial project and team; and they know how to evaluate it and make it grow.” Nevertheless, in most areas of the world, including Latin America, angel investors and those who manage investment funds do not have an entrepreneurial character. “They come from investment banking, not from entrepreneurship.” So, “the mindset of this type of investor needs to be changed.”

Beyond that, Silicon Valley has two of the most prestigious engineering schools in the world – Berkeley and Stanford - as well as a diversity in its population that is very hard to replicate. Many countries have tried to duplicate the model of Silicon Valley, and some of them have succeeded a great deal, such as Israel. “But [Israel] is a special case, because it takes in a lot of money from the United States, and there are lots of investors and funds that originate in the U.S. In addition, there is a very strong entrepreneurial culture there,” he points out.

Now, however, the barriers to becoming more like Silicon Valley are starting to fall away, says De l’Etraz. He notes that countries such as Spain are transforming themselves into new destinations for establishing their own start-ups because in these countries “salary levels are lower [thus, more competitive]; there is a good educational system; there is a workforce with technical experience and the quality of life is high. Meanwhile, prices in Silicon Valley are prohibitively expensive.” As an example, he cites Tyba, a company founded by foreign students who live in Spain, which helps connect companies with young talent over the Internet.

The same conditions that exist in Spain are surfacing in numerous countries in Latin America. Javier Zúñiga, director of computer engineering at UADE in Argentina, notes that entrepreneurs in his country depend on “a very good quality of human resources in its educational system, and a high level of English training for international projects and activities, which is something fundamental in IT.”

THE OBSTACLES

Nevertheless, there are some obstacles that still need to be overcome. Del Pup, the 29-year old Argentine who co-founded Skonto, complains about the lack of risk financing, not just in his homeland but in the rest of the region. He adds that there are not enough governmental institutions that support entrepreneurs, “despite the fact that the [technology sector] is growing and needs to be pushed.”

De l’Etraz adds that during a recent visit to Argentina, he noticed that entrepreneurs were nervous about the shortage of foreign confidence in the local market, which has compelled many start-ups to leave for other countries. “On Venture Day in Mexico, there were several Argentine projects. The same thing happened in Colombia. Argentines are very entrepreneurial, and they know how to sell. The country offers many opportunities, but so long as the political situation remains unstable, things are not going to grow the way they should.”

According to Martin Vivas, the facilitator of Startup Weekend in Buenos Aires, an initiative that aims to set up new companies in just three days, the investment funds don’t always get to Argentina. “Investors try to create a relationship with entrepreneurs and, in that sense, [entrepreneurs here] are a bit far away,” notes Vivas, who is a member of Palermo Valley, a community of entrepreneurs that tries to promote the Internet sector while traveling to other markets. “We have seen projects of other countries that were not different from ours. We have high quality professionals,” he says.

De l’Etraz notes that there is a crucial problem to solve in the region: How to create favorable fiscal policies for angel investors through tax deductions in case they suffer losses. “On July 10, we have a Venture Day in Colombia, and one of the requirements is that the companies are Colombian. But what does it mean to be Colombian when many companies are set up in Miami but do business in Colombia and in other places because of the tax situation [in Colombia]?”, asks De l’Etraz. “Governments must take this topic seriously and create policies, such as those in the United States, in order to attract investments and make it attractive, in terms of taxation, to take risks in the world of the start-up.”

Given that situation, De l’Etraz does not believe that a technological revolution is taking place in the region at this time. However, he does believe that it will take place in the future. The number of entrepreneurial events has increased, he notes, and there is greater involvement on the part of governments. He points out, for example, that there is a “macro event” for entrepreneurs organized in November by the government of Peru. Nevertheless, he warns that the private sector has to get involved if the long awaited growth in this sector is to take place.

THE ACCELERATORS

Meanwhile, some entrepreneurial “accelerators” and initiatives that are looking for innovative projects have arrived “at the end of the world,” as the new Argentine-born Pope Francisco has dubbed Argentina. These initiatives have provided an economic boost to the country.

One such initiative is Wayra, an accelerator that belongs to Telefónica, the telecom firm. Wayra provides seed capital of up to $50,000 to those start-ups that are “hungry” to grow and expand beyond their own frontiers. “Wayra was conceived for Latin America because we imagined that [the region] had the entrepreneurial ecosystem that we were searching for,” notes Andres Saborido, country manager at Wayra Argentina. “We knew that the projects in this region were good ones, so we expanded first in Argentina, Colombia, Mexico and Spain. The conditions were ideal in the sense that there was a lot of talent -- people who had various initiatives and ideas but who did not have the resources to move forward.

“We offer these people a work space at Telefónica, and for four to 12 months we help them with coaching and mentors so that they will focus on understanding legal aspects of corporations, as well as product design. We try to provide them with quick methods for developing applications, testing them and giving them value, even within just a weekend,” says Saborido.

Once all that has been completed, Wayra offers the possibility of working with Telefónica. “This gives the entrepreneur a scale [of operations] because we are in 12 countries. In return for these services, we retain 10% of the equity or capital of the start-up, but the decision about whether or not to provide services to Telefónica is left up to the entrepreneur,” he says. That happened in the case of Joincube, an Argentine business-to-business social network that involves both Telefónica as well as firms in other countries. In Chile, Joincube even received capital from an investment fund.

Wayra’s Saborido notes that entrepreneurs are often waiting for the arrival of angel investors. However, since capital is not available for everyone, in his view “the interesting thing is that companies focus [instead] on a regional or global market, so that they can access foreign funds.” Wayra has already invested in 18 companies in Argentina, and 180 companies worldwide.

LEARNING HOW TO FAIL

During the initiative known as Startup Weekend, each participant pitches an idea for one minute. The best pitches are chosen in a vote, and the winners are equipped with teams for developing them. However, it rarely happens that the “start-ups become real companies,” notes Vivas. Nevertheless, in his view, these events help participants acquire the skills and experience that are going to help them forge their future as entrepreneurs. They learn how to make mistakes, which is very useful in the case of Argentine entrepreneurs, who are “very easily frustrated, unlike English-speaking entrepreneurs, who know how to wait until an idea [catches on] and matures over time.”

Vivas stresses that although Argentines have other strong qualities – such as skill at resolving complicated problems – they have trouble planning ahead, “perhaps because we are constantly in a crisis mode.” As a result, it is hard for them to plan over the long term, with a view five years ahead. In Argentina, “Entrepreneurs expect great results in just a short time,” he says.

On the other hand, entrepreneurs in the region face another handicap from a cultural viewpoint. “An entrepreneurial failure is considered a personal failure,” notes De l’Etraz. In his view, tax policies also have an influence on all this. “They are always telling you not to be afraid of failing, but they don’t help you to feel that way because if your project does fail, you can’t just wipe the slate clean, since you carry your debts with you [into the future]. In contrast, in the U.S., if I am an entrepreneur and I fail, and my company goes bankrupt, I can wipe the slate clean and start all over again.”

In addition to learning how to make mistakes, experts note that Latin American entrepreneurs must overcome their fear of relying on an idea. As Vivas explains, “Often, entrepreneurs believe that they are going to be robbed, and this also has to do with their fear of failure. In Latin America, they start with the view that competition is the enemy -- that it is bad to make mistakes. But [in fact,] our enemies teach us. This is a transparent industry, and if you are doing well it is because you are doing things the right way.”

In that respect, Skonto’s Del Pup offers this recommendation: “Although an idea may seem like a small one, you need to talk about it and act on it.  You have to consider the project, and the more people who participate in it, the better. It can’t be just one person against the world.” In fact, his company brought in Ignacio Raffa and Nicolas Vilela, two computer science students, to add value to their technical department. “It was very important because it added a different perspective for the business. Everyone wins when your plans bear fruit; it is another way of cooperating in a cost-effective way.”

On the other hand, UADE’s Zúñiga notes that some projects that begin within a computer science career path lack commercial vision. “We help [those sorts of students] link up with students who have other specialties. We try to work with them and add the part that they are missing in their professional training, such as how to create a business plan,” he notes.

Overall, adds De l’Etraz, universities have a great deal to contribute when it comes to strengthening entrepreneurial activity in the region. “Students are the ones who have to begin to think like entrepreneurs. We have to start teaching them that learning how to fail is as much a part of the learning process as learning how to sell. This is the big challenge.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania
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