As I discussed earlier, one of the most important determinants of success for a startup company is whether or not it has access to funding and other types of support. The truth is that in Latin America, new initiatives don’t get much support, especially from the public sector. Governments and investment promotion agencies are usually too busy trying to attract US companies to pay any attention to homegrown companies. It’s an unfortunate approach because some of the best providers now operating internationally have their roots in Latin America – including Softtek – and they add much to the local economies in terms of GDP and job creation.
For today’s post, I’ll continue borrowing from my chat with Francisco Alvarez-Demalde, founding partner at Riverwood Capital.
Bad examples: Brazil and Argentina
It’s a sad situation in these two countries, given the tremendous entrepreneurial spirit of their people, that their governments do little to promote startup initiatives. In Argentina, the Fernandez administration has not had a cosy relationship with the business sector, much less the outsourcing industry. The government has a history of changing the rules for investment arbitrarily, and promoting some sectors over others according to personal ties and friendships. In other words, there’s a lot of bureaucracy that start-ups have to get through. In spite of that climate, certain cities are attracting attention in ITO (Cordoba), certain industries are exploding (media and creative design in Buenos Aires), once small companies are growing bigger in the US (Belatrix Software Factory), and companies have generally learnt to get by without the government.
Brazil is a country that could be great, and it almost is. The one issue with its investment climate that keeps coming up is the legal framework and tax structure – which is a serious issue for new companies trying to make a dent in the market. “In Brazil these requirements are extremely burdensome on entrepreneurs and new companies, causing a lot of bureaucracy and extra work that make the initial startup cost very high,” says Alvarez-Demalde. Especially in university cities like Curitiba and Campinas, the best new ideas and companies are continually forming. But many of them don’t make it out of the bureaucratic maze that is Brazil’s tax and legal framework.
A good example: Chile
By contrast, Chile has radically modernized its tax and legal system, making it much easier for new initiatives. And that’s not all. Chile’s government is demonstrating its commitment to entrepreneurship with a new program called Start-Up Chile. The goal is to bring together foreign companies and local entrepreneurs, and encourage that interaction. 2010 was the pilot phase, and all reports show that it worked well. As Brenna Loury of the program recently said, “We learned that you can’t just throw money at people. You have to create an environment for entrepreneurship.”
Chile has another, maybe even better, program. Called Global Connection, it send 20 Chilean tech entrepreneurs to Silicon Valley to incubate in the Plug and Play Tech Center. The government covers almost all the fees, and allows the start-ups to remain in the incubator for three months. The obvious effect that the government expects from this is to make these new firms competitive in the US market, by exposing them early. That’s what I call a forward-thinking public sector.