13. March 2013–
Instead of starting work on an "Airbnb for cats" or looking longingly at the US market, why not look to the vast, vibrant markets emerging further south? Jeremy Wilson explains why Mexico and Colombia are shaping up as the "new Brazil"...
For European entrepreneurs contemplating their next gambit, things aren't too promising. Despite the hype, major European exits are painfully thin on the ground and the whole continent is buckling under financial crisis.
It's easy to despair when becoming the Airbnb for cats is all the rage. However, for those willing to think globally, the opportunities are as great as ever.
Forget Brazil – it's no longer easy to get in
Of all the emerging economies, it's no secret that Brazil has been the darling of the international tech startup community for some years. While the bandwagon is still to some extent rolling – Brazil's online economy is growing at a rate that will see it overtake Germany within a couple of years – the boom years are over. At least for those who aren't already in on the action.
The bubble hasn't burst, but Brazil’s economy is slowing, inflation is rising and the currency is overvalued. While it is still rightly seen as a good long-term prospect, the country is no longer a goldmine.
There are, fortunately, several large markets beginning to open in the region that have much in common with Brazil at the start of its boom. A young population, flourishing middle class, rocketing increase in internet connectivity and economies that avoided the worst of the global financial crisis.
While Latin America's reputation for tinpot Governments and anti-enterprise values isn't undeserved, the economic growth of some countries speak for themselves. Brazil, Uruguay, Chile, Meicxo, Peru, Panama and Colombia have reasonably strong economies.
Why Mexico and Colombia should be on your radar
While all these countries have something to recommend for themselves to the international entrepreneur, the stand out contenders to become the new Brazil are Mexico and Colombia. They have a population of 162 million between them and have the additional bonus (to capitalists at least) of not being bogged down by excessive populist and left-wing politics.
Mexico and Colombia not only share many traits with Brazil, they are arguably an overall much more attractive proposition for startups. Doing businesses in both countries is easier than virtually every other developing nation and significantly easier than Brazil. It takes nine days to start a business in Mexico and thirteen in Colombia. In Brazil it take 119.
Also of significant interest to new businesses is the cost of operating in Mexico and Colombia compared to Brazil. Property, food, services – anything that hasn't been imported, can still be had at third-world prices. In Brazil however, the boom has wreaked havoc on its currency, with the real now severely overvalued. Staggeringly, only Hong Kong and London have more expensive office space than Rio de Janeiro.
The payment problem...
For those thinking of dipping their entrepreneurial toe into these exotic waters, the most obvious opportunities are in eCommerce and therein lies the most obvious obstacle – Mexico and Colombia are largely still cash economies. Only 30 per cent of Colombians and 27 per cent of Mexicans hold an account with a formal financial institution.
Banks accounts are few and credit cards are even fewer, with 10 and 13 per cent of adults holding one from Colombia and Mexico respectively. Among the many factors holding back the cashless economy is the shadow of corruption that still lingers over the region. Even those with credit cards are uncomfortable giving out their card details online. Colombia suffers more than most in this regard: some international processors are loathe to accept cards simply on account of them being registered in Colombia.
Online payments are a lucrative problem where international companies such as PayPal have largely failed to make a dent. In many ways the solution requires a payment system to be invented for the market, not adapted. The first continent-wide success story to come out of Colombia is Latin American Payments, a company that facilitates local payment methods such as cash and bank transfers for online payments.
The opportunity to innovate in a landscape barren of the major finance institutions is huge.
To clone or not to clone?
As much as innovation has its place, execution is king when taking on a new market. The growth of Brazil’s new technology sector has largely been on the back of transplanted Silicon Valley business models. Cloning is without doubt the best way to take advantage of Mexico's and Colombia emerging markets.
Unsurprisingly Rocket Internet is already rolling out clones in the most lucrative online sectors. Their strategy is well known – take a business model, roll it out in a new market, raise capital, expand as fast as that capital will allow. Sell.
For Europeans it's sometimes hard to picture what a new emerging middle class looks like and appreciate the changes it brings. The emergence of a large group of young, educated and employed people changes a country. The shiny shopping malls springing up on the edge of Latin American towns are more than temples to air-conditioned consumerism. Imported electronics, fashion and branded goods are all integral to a new and exciting way of life.
Online commerce was successful in the developed world because it offered more choice and offered it cheaper. It was lazy consumerism. For an aspirational middle class with money to spend for the first time, the promise of more for less is irresistible and exciting.
The potential for eCommerce in these markets should make European entrepreneurs salivate with excitement in a manner not seen since the heady pre-dotcom bubble days.
There's a virgin market appearing overnight, fuelled by rocketing internet connectivity. Colombia in particular has been eye-watering in this regard. In 2010 it had 2.2 million internet connections, by the end of this year it will have around nine million. Next year about half of all Colombian and Mexican households will be online.
Between 2007 and 2009, Brazil was managing an 80 per cent year-on-year increase in online spending. By 2010, when Brazil's online population was comparable to current day Mexico and Colombia, sales were worth around $8bn. Last year it was $23bn.
Vast new online populations, disposable incomes, regional success stories – none of this guarantees an entrepreneur revenue. But it should make him or her think twice before spawning the next social-centric restaurant recommendation app.