Entrepreneurships in Latin America have great potential for economic and social development, but also with important challenges to overcome. These include low productivity, low innovation, high informality, inequality and vulnerability to external shocks. In this context, entrepreneurship is presented as an opportunity to generate employment, income, innovation and well-being for the population.
However, not all kinds of entrepreneurship have the same impact. There is a great heterogeneity among Latin American entrepreneurs, both in their personal characteristics and in those of their businesses. On the one hand, there are entrepreneurs who create companies out of necessity, in the absence of job alternatives, and operate in sectors of low productivity and competitiveness, with little chance of growing and generating added value. On the other hand, there are entrepreneurs who create companies by opportunity, taking advantage of the advantages of a market, technology or innovation, and operating in dynamic sectors and with the potential for escalation, generating quality jobs and social impact.
In this sense, the term “startups” has been coined to refer to young companies or enterprises in Latin America, as the case may be, innovative and with high growth potential, which are based on the intensive use of technology and which seek to solve problems or meet the needs of consumers or society. These companies are characterized by having a scalable business model, which allows them to expand rapidly to new markets and customers, and by requiring external financing, usually venture capital, to sustain their growth.
Startups are a type of high-impact entrepreneurship, which can contribute significantly to the development of Latin America, by generating innovation, employment, income, competitiveness and solutions to the social and environmental problems of the region. However, if these companies can emerge and thrive, a favourable ecosystem is required, providing them with the right support, resources, connections and environment.
This article analyzes the current state and challenges of the startup and tent ecosystem in Latin America, as well as opportunities and good practices to promote its development. Available information is used from various sources, such as the Global Entrepreneurship Monitor (GEM), the World Bank, the Inter-American Development Bank (IDB), Crunchbase and other academic and international agency studies.
The ecosystem of startups and ventures in Latin America
An ecosystem of startups and entrepreneurship can be defined as the set of actors, institutions, resources and conditions that influence the process of creating, developing and consolidating young and innovative enterprises. Among the main components of an ecosystem are the following:
Entrepreneurs: they are the people who identify a business opportunity, create a company and lead it. Entrepreneurs can be classified according to their motivation (needs or opportunity), their stage (potential, nascent, established or discontinued), their sector (primary, secondary or tertiary), their orientation (local, national or international), their innovation (product, process, market or organization) and their impact (economic, social or environmental).
The startups
They are young, innovative and with high growth potential, which are based on the intensive use of technology and that seek to solve problems or meet the needs of consumers or society. Startups can be classified according to their stage (idea, validation, traction or scale), their sector (Fintech, Agrotech, Edtech, Healthtech, etc.), their business model (B2B, B2C, B2G, etc.) and their impact (economic, social or environmental).
Investors in Latin America ventures
They are the people or organizations that provide capital to startups and entrepreneurship, in exchange for a shareholding or a financial return. Investors can be classified according to their stage (seed, angel, venture capital, private equity, etc.), their sector (generalist or specialized), their origin (local, regional or global) and their impact (economic, social or environmental).
The facilitators
They are people or organizations that provide support services to startups and initiatives, such as mentoring, training, counseling, incubation, acceleration, coworking, networking, etc. Facilitators can be classified according to their type (public, private, mixed or academic), their sector (generalist or specialized), their scope (local, regional or global) and their impact (economic, social or environmental).
Regulators in Latin America
They are the individuals or organizations that establish the rules, laws, policies and incentives that affect the functioning and development of startups and enterprises. Regulators can be classified according to their level (national, regional or local), their sector (general or specific), their orientation (facilitator or restrictive) and their impact (economic, social or environmental).
Consumers
They are the people or organizations that demand the products or services offered by startups and enterprises. Consumers can be classified according to their type (individual or collective), their sector (public, private or social), their profile (early adopter, mainstream or laggard) and their impact (economic, social or environmental).
These components interact with each other, generating a dynamism and feedback that determine the performance and potential of the ecosystem. The ecosystem is also influenced by external factors, such as the economic, social, cultural, political and environmental context, which can create opportunities or threats for start-ups and enterprises.
To measure and compare the ecosystem of startups and ventures in Latin America, various indicators can be used, such as the level of entrepreneurial activity, the degree of innovation, access to finance, the quality of support, the regulatory framework and the impact generated. Below is a brief description and analysis of some of these indicators, based on the information available from various sources.
Level of entrepreneurial activity
The level of entrepreneurial activity refers to the proportion of the population involved in the creation or development of a company, either out of necessity or by opportunity. This indicator can be measured through the Entrepreneurship Activity Rate (TEA), which is the percentage of the adult population (18-64 years) that is starting a business (less than 3 months) or has an established business (more than 3 months and less than 42 months).
According to the GEM 2019/2020 report, the average Latin America and Caribbean TEA was 19.8%, meaning that almost one in five adults were undertaking in the region. This level is higher than in other regions, such as Europe and Asia, and is only surpassed by Africa. However, this high entrepreneurial activity does not necessarily have a high impact, since most entrepreneurs do so out of necessity and not by opportunity, and operate in sectors of low productivity and competitiveness, with little chance of growing and generating added value.
Among the countries of the region, there is a great heterogeneity in the level of entrepreneurial activity, ranging from 7.6% in Uruguay to 40.1% of Ecuador. The countries with the highest ASD have the lowest level of economic and social development, such as Ecuador, Bolivia, Guatemala and Colombia, while the countries with the lowest ASD have the highest level of development, such as Uruguay, Chile, Brazil and Argentina. This suggests that there is an inverse relationship between the level of entrepreneurial activity and the level of development, which is explained by the increased presence of entrepreneurs by necessity in the least developed countries.
Degree of innovation
The degree of innovation refers to the ability of start-ups and enterprises to generate new or improved products or services, which differ from those existing on the market and bring value to consumers or society. This indicator can be measured through the Innovative Entrepreneurship Rate (TEI), which is the percentage of the adult population that is involved in an enterprise that offers a product or service that is new to at least some customers and faces little or no competition.
According to the GEM 2019/2020 report, the average TEI of Latin America and the Caribbean was 5.3%, which means that only one in twenty adults was undertaking innovatively in the region. This level is lower than in other regions, such as Europe and Asia, and is only surpassed by Africa. This implies that most Latin American entrepreneurs are not generating innovation, but are replicating existing business models, with little differentiation and added value.
Among the countries of the region, there is a great heterogeneity in the degree of innovation, ranging from 1.6% in Guatemala to 11.4% in Chile. The countries with the highest TEI have the highest levels of economic and social development, such as Chile, Uruguay, Costa Rica and Argentina, while the countries with the lowest TEI have the lowest level of development, such as Guatemala, Bolivia, Ecuador and Peru. This suggests that there is a direct relationship between the degree of innovation and the level of development, which is explained by the increased presence of entrepreneurs per opportunity in the more developed and need-nation entrepreneurs in the least developed countries.
Access to financing finance of Latin America
Access to financing refers to the availability and quality of capital sources that can provide resources to startups and ventures, both in their early stages and in their stages of growth and consolidation. This indicator can be measured through the amount and value of investments made by different types of investors, such as angels, venture capital funds, private equity funds, etc.
According to the IDB 2020 report, access to finance is one of the main challenges facing startups and ventures in Latin America, as there is a shortage and concentration of capital sources, both geographical and sectoral.
The report notes that 1,920 investments totalling $4.6 billion were registered in the region in 2019, representing a 25 per cent increase in the number of investments and an 18 per cent decrease in the value of investments from the previous year. However, 80 per cent of investments were concentrated in only three countries (Brazil, Mexico and Colombia) and 70 per cent of investments focused on only three sectors (Fintech, Marketplace and E-commerce).
Among the countries of the region, there is a great heterogeneity in access to finance, ranging from the $2.3 million invested in Paraguay to the $2.7 billion invested in Brazil. The countries with the greatest access to finance are those with the largest market size, greater economic and social development, and the greatest maturity of the ecosystem, such as Brazil, Mexico, Colombia and Argentina, while the countries with the lowest access to finance are those with the lowest market size, less economic and social development, and less maturity of the ecosystem, such as Paraguay, Bolivia, Ecuador and Peru.
Quality of support
The quality of support refers to the availability and quality of support services that can provide technical assistance, training, mentoring, incubation, acceleration, networking, etc. to startups and enterprises, both in their early stages and in their stages of growth and consolidation. This indicator can be measured through the number and type of facilitators that exist in the ecosystem, as well as the perception and satisfaction of enterprises in Latin America with respect to the support received.
According to the IDB 2020 report, the quality of support is one of the main factors influencing the success of startups and ventures in Latin America, as there is a positive correlation between the level of support and the level of innovation, access to financing and the impact generated. The report notes that 1,221 facilitators were identified in the region in 2019, an increase of 18 per cent over the previous year. However, 75% of the facilitators concentrated in only five countries (Brazil, Mexico, Colombia, Argentina and Chile) and 60% of the facilitators focused on only three sectors (Fintech, Marketplace and E-commerce).
Among the countries of the region, there is a great heterogeneity in the quality of support, ranging from the 8 facilitators identified in Paraguay to the 433 facilitators identified in Brazil. The countries with the highest quality of support are those with the highest market size, the greatest economic and social development, and the greatest maturity of the ecosystem, such as Brazil, Mexico, Colombia and Argentina, while the countries with the lowest quality of support are those with the lowest market size, the least economic and social development, and the least maturity of the ecosystem, such as Paraguay, Bolivia, Ecuador and Peru.
Regulatory framework
The regulatory framework refers to the set of rules, laws, policies and incentives that affect the functioning and development of startups and enterprises, both in terms of facilitating or restricting their creation, operation, growth and consolidation, and of promoting or disincentivizing their innovation, financing and impact. This indicator can be measured through the evaluation of the different aspects that make up the regulatory framework, such as the ease of starting a business, the protection of intellectual property, taxation, competition, public procurement, etc.
According to the World Bank 2020 report, the regulatory framework is one of the main challenges facing startups and ventures in Latin America, as there is a complexity and rigidity of the rules, laws, policies and incentives that hinder their creation, operation, growth and consolidation, and that discourage their innovation, financing and impact.
The report notes that in 2019 the average for Latin America and the Caribbean ranked 79th out of 190 countries in the business facility ranking, an improvement of two places over the previous year, but is still below the global average and other regions. The report also indicates that in 2019 only five countries in the region (Chile, Colombia, Mexico, Peru and Uruguay) implemented regulatory reforms to improve the business climate for startups and ventures.
Among the countries of the region, there is a great heterogeneity in the regulatory framework, ranging from 59th place in Chile to the 173rd place in Venezuela in the ranking of ease to do business. The countries with the best regulatory framework are those with the highest level of economic and social development, greater political stability and greater openness to trade and investment, such as Chile, Mexico, Colombia and Peru, while the countries with the worst regulatory framework are those with the lowest level of economic and social development, the lower political stability and less openness to trade and investment, such as Venezuela, Bolivia, Ecuador and Argentina.
The impact generated on enterprises in Latin America
The impact generated refers to the positive effects that startups and enterprises produce on the economy and society, both in terms of generating employment, income, innovation and competitiveness, and of solving problems or meeting social and environmental needs. This indicator can be measured through the estimation of the results and indicators that reflect the impact generated by startups and enterprises, such as the number of jobs created, the added value generated, the number of clients served, the number of problems or needs solved or met, etc.
According to the IDB 2020 report, the impact generated is one of the main objectives pursued by startups and ventures in Latin America, as there is a growing awareness and commitment to sustainable development and social inclusion. The report notes that in 2019 58% of startups and ventures in the region reported having a positive social or environmental impact, an increase of 10% over the previous year. However, 42 per cent of start-ups and ventures in the region did not measure or report their impact, making it difficult for them to assess and communicate.
Among the countries of the region, there is a great heterogeneity in the impact generated, ranging from 38% of startups and ventures with positive social or environmental impact in Mexico to 78% in Chile. The countries with the greatest impact generated are those with the highest level of economic and social development, the highest quality of support, greater access to financing and the highest degree of innovation, such as Chile, Uruguay, Colombia and Argentina, while the countries with the least impact generated are those with the lowest level of economic and social development, lower quality of support, lower access to financing and less degree of innovation, such as Mexico, Bolivia, Ecuador and Peru.
Cases of successful ventures in Latin America
Rappi, Colombia
Founded in Bogota in 2015, Rappi is a home delivery company that began as a grocery delivery service and has evolved into a super app in Latin America. The platform allows users to buy products of various categories, from food to medicines and electronics, and receive them at home. Rappi has managed to expand to several countries in the region, such as Mexico, Brazil, Argentina, Chile, Uruguay, and Peru, among others.
Mr. Nubank (Brazil)
Nubank is a digital bank founded in 2013 that has revolutionized the banking sector in Latin America. In order to simplify people’s financial lives, it offers a credit card without annual fees completely controlled from a mobile app, as well as savings accounts and personal loans. Nubank has become the largest digital bank in the region and one of the largest in the world, with millions of customers in Brazil, Mexico, and Colombia.
Free Market (Argentina)
Founded in 1999, Mercado Libre is the largest e-commerce platform in Latin America. It allows users and companies to sell and buy products from various categories easily and safely. The company has expanded its operations to 18 countries in the region, including Mexico, Brazil, Venezuela, Chile, Colombia, and Peru. In addition to the e-commerce platform, Free Market has diversified its services including Market Payment, an online payment solution, and Market Shipping, a logistics service.
Despegar.com (Argentina)
Founded in 1999, Takeoff is the leading online travel agency in Latin America. It offers a wide range of travel services, including hotel booking, airline tickets, tour packages, and car rental, among others. The company has achieved a strong presence in the region, operating in 21 countries and facilitating tourism inside and outside Latin America.
Globant (Argentina)
Since its founding in 2003, Globant has excelled as a leading company in software and technology development. With a strong focus on digital innovation and design, Globant offers technological solutions to major global companies. Its success is reflected in its international expansion, with offices in the United States, Europe, and several Latin American countries.
Conclusions and recommendations
Based on the analysis of the ecosystem indicators of startups and ventures in Latin America, the following conclusions and recommendations can be drawn:
- Latin America is a region with great potential for the development of high-impact startups and ventures, which can contribute significantly to the economic and social development of the region, by generating innovation, employment, income, competitiveness and solutions to the social and environmental problems of the region.
- However, Latin America is also a region with major challenges to overcome, such as low productivity, low innovation, high informality, inequality and vulnerability to external shocks, which limit the emergence and growth of high-impact startups and ventures.
- Likewise, Latin America is a region with great heterogeneity among countries, both in their levels of economic and social development, as well as in their conditions and components of the ecosystem of startups and enterprises, which generates differences in the performance and potential of startups and enterprises of each country.
- Therefore, a coordinated and sustained effort of the different actors in the ecosystem, such as entrepreneurs, investors, facilitators, regulators and consumers, is required to create an enabling environment that provides the support, resources, connections and environment suitable for the development of high-impact startups and ventures in the region.
- Among the main actions that can be implemented to promote the development of high-impact startups and ventures in the region are the following:
- Promote an entrepreneurial culture, which stimulates creativity, innovation, risk and impact, and recognizes and celebrates the success and failure of entrepreneurs.
- Promote entrepreneurship by opportunity, based on the identification and exploitation of the advantages of a market, technology or innovation, and operates in dynamic sectors with the potential for escalation.
- Facilitate access to financing, which provides adequate and timely capital for start-ups and entrepreneurship, both in its early stages and in their stages of growth and consolidation, and that adapts to the needs and characteristics of each entrepreneurship.
- Improve the quality of support, which provides technical assistance services, training, mentoring, incubation, acceleration, networking, etc. to startups and ventures, both in their early stages and in their stages of growth and consolidation, and that conforms to the requirements and objectives of each entrepreneurship.
- Strengthen the regulatory framework, which establishes rules, laws, policies and incentives that facilitate the creation, operation, growth and consolidation of startups and enterprises in Latin America, and that promote their innovation, financing and impact, both at the national and regional levels.
- Promote the impact generated, which stimulates the measurement and communication of the positive effects that startups and ventures produce on the economy and society, and that encourages the generation of shared value among the different actors of the ecosystem.
These actions require a strategic vision, effective collaboration and continuous evaluation, which will allow us to adapt to the needs and opportunities of each country and the region, and that contribute to the consolidation of an ecosystem of high-impact startups and ventures in Latin America.
Bibliographical references
- GEM (2020). Global Entrepreneurship Monitor 2019/2020 Global Report. Entrepreneurships in Latin America.
- IDB (2020). The state of high-impact entrepreneurship in Latin America and the Caribbean 2020.
- World Bank (2020). Doing Business 2020. Entrepreneurships in Latin America.
