tech in mexico: a confluence of latin america, the us and asia

Mexico's Rising Tech Scene: An Investor's Perspective

Mexico is increasingly recognized as a burgeoning technology center and a key entry point into the Latin American marketplace.

As an investor specializing in products geared towards developers, open-source ventures, and infrastructure technologies – with a specific focus on innovation within emerging markets – I sought to gain direct insights through on-the-ground experience.

Firsthand Exploration During the Pandemic

Despite the challenges presented by the continuing pandemic, comprehensive safety measures were implemented, allowing for a seven-week period of immersion in Mexico between January and March.

The majority of this time was dedicated to engaging with founders, aiming to understand their projects, the rationale behind their concepts, and the broader ecosystem's development in supporting their goals.

Key Areas of Investigation

My investigation centered around understanding the current state of the Mexican tech ecosystem.

This involved exploring the motivations driving entrepreneurial activity and assessing the resources available to support innovation.

• Founder Interviews: Direct conversations with startup leaders provided valuable qualitative data.
• Ecosystem Analysis: A comprehensive review of the support structures available to tech companies.
• Market Dynamics: Understanding the forces shaping the growth of the tech sector in Mexico.

The goal was to develop a nuanced understanding of Mexico’s potential as a significant player in the global tech landscape.

Connections Between the U.S., Asia, and Latin America

A noteworthy trend has emerged: Latin American entrepreneurs frequently draw inspiration for product development and expansion strategies from prominent Asian technology companies.

Founders are increasingly familiar with firms such as Tencent, DiDi, and Grab. This inclination stems from the similarities between market dynamics in Mexico and other Latin American nations, and those found in China, India, and Southeast Asia, rather than the United States.

Initial Focus on U.S. Models

Typically, entrepreneurs initially attempt to replicate and adapt successful U.S. startups. However, upon achieving product-market fit, their focus often shifts towards Asian tech companies as sources of innovation.

These inspirations are then modified to align with the specific requirements of the local market.

Rappi as a Case Study

Rappi, initially a grocery delivery application, exemplifies this trend. The company’s strategic goal is to evolve into the leading superapp within Latin America.

This ambition is being pursued through substantial expansion, both in terms of geographic reach and the diversification of its service offerings, encompassing restaurant delivery, pharmacy services, and even COVID-19 testing.

Furthermore, Rappi is integrating new payment, banking, and financial services into its platform. Rappi Pay was recently launched in Mexico.

The Influence of Asian Tech Giants

Rappi’s current trajectory more closely resembles that of Meituan and Grab than its U.S.-based competitors, a deliberate alignment.

This is partly due to significant investment from SoftBank, a firm with substantial holdings in numerous Asian tech companies. SoftBank has invested heavily in Rappi’s recent funding rounds.

The company also manages a $5 billion fund specifically allocated to the Latin American region.

Consequently, the knowledge and experience gained by Asian technology companies over the past decade are being transferred to companies like Rappi, even as Silicon Valley observes.

• Key takeaway: LatAm entrepreneurs are increasingly looking to Asia for inspiration.
• Strategic shift: Initial focus on U.S. models evolves to embrace Asian strategies.
• Investment impact: SoftBank's involvement facilitates knowledge transfer.

Competition in the U.S.-Asia-LatAm Tech Landscape

Beyond the exchange of knowledge, a significant competitive dynamic is emerging within the relationship between the U.S., Asia, and Latin America.

Specifically, Asian technology companies are increasingly expanding their operations into Mexico and other countries in Latin America, driven by comparable market conditions. A notable example of this trend, observed firsthand, is the expansion of DiDi.

DiDi initiated its entry into the Latin American market in January 2018 through the acquisition of 99, a prominent ride-sharing service based in Brazil. Subsequently, in April 2018, DiDi launched its core ride-hailing service within Mexico.

The introduction of DiDi Food, the company’s food delivery platform, followed in April 2019, initially in Monterrey and Guadalajara – major metropolitan areas in Mexico. This expansion has continued at a rapid pace, bolstered by incentives offering delivery drivers an additional 10% in earnings.

During a stay in Mexico City, my lodging was situated just two blocks from a substantial WeWork building housing DiDi’s local offices. Daily, a considerable queue of individuals could be seen responding to the earnings incentives, awaiting the opportunity to be onboarded as DiDi delivery personnel.

Conversely, the nearby Uber office exhibited minimal pedestrian traffic. While Uber and Rappi concentrate on attracting more affluent customers, DiDi is focused on acquiring users with lower incomes to increase its market share.

The strategy anticipates that a portion of these users will eventually move into the middle class and become more profitable consumers. DiDi’s expansion isn’t limited to major cities; it also includes smaller urban centers, such as Querétaro, which I also had the opportunity to visit.

Furthermore, DiDi employs a multiproduct approach, prominently promoting its own payment solution, DiDi Pay, in these new markets. This diversified strategy is likely a response to the intense competition within the local fintech sector.

A report from Finnovista indicates the presence of 441 fintech startups in Mexico, encompassing a wide range of services, including remittance solutions and diverse financial offerings like lending, wealth management, and insurance.

Despite the vibrancy of the Mexican fintech startup ecosystem, a dominant player has yet to emerge. The landscape remains open for established companies like Rappi and DiDi, as well as new market entrants.

A significant portion of the Mexican population remains unbanked or underbanked. Simultaneously, smartphone penetration is remarkably high, with between 80 and 90 million smartphones among Mexico’s 128 million citizens.

The affordability and quality of data plans offered by telecommunications providers like Telcel are often superior to available WiFi connections. This trend demonstrates a clear shift in Mexico, bypassing traditional internet access and moving directly to mobile internet connectivity.

This leapfrogging effect may extend further, potentially leading to a transition from cash and traditional accounting methods directly to digital payments and neobanks – a pattern frequently observed in “Asian tech” markets.

While my investment focus doesn’t center on fintech, I cannot predict the future evolution of this sector in Mexico. The success of DiDi’s capital-intensive strategy targeting lower-income users in Latin America remains to be seen. However, it is undeniable that Asian tech companies are exerting a substantial influence in the region, serving as both a source of inspiration and a competitive force.

The Emergence of Startup “Mafias”

A noticeable trend is the relative scarcity of startups concentrating on fundamentally technical endeavors – such as AI/ML, infrastructure, and APIs – where technology serves as the primary competitive advantage, rather than merely a supporting element. My investment strategy centers on this area, and I anticipate a shift in the coming years due to the formation of what I call “mafias.”

The “mafia effect” is a crucial factor in the sustained development of a technology ecosystem. It involves former employees of successful tech companies launching their own ventures or providing early-stage funding as angel investors. The stories of “mafias” originating from companies like PayPal and YouTube are well-known.

More recently, we’ve seen similar patterns with Pinterest, Square, and Stripe, alongside industry leaders such as Google and Facebook.

In Mexico, and several other nations, networks of former employees from Rappi and Uber’s Latin American divisions are establishing their own startup communities.

Former Rappi personnel are widely dispersed. Despite being based in Mexico, it was straightforward to connect with Rappi-affiliated founders in Colombia, the company’s country of origin.

The Rappi “mafia” has already spawned several companies, including Tributi – specializing in tax filing automation – Plerk, which focuses on employee benefits, and HelloGuru, a no-code platform.

Uber’s expansion throughout Latin America, particularly the establishment of significant engineering and data science centers in Mexico and Brazil, has led to a growing number of ex-employees becoming founders.

Notable startups emerging from the Uber LatAm network include Heru – offering professional services for gig workers – and Cloud Humans, a freelancer marketplace. Kavak, Mexico’s first unicorn company, also demonstrates the potential for a similar “mafia” effect.

My exploration during this trip didn’t extensively cover Brazil, as its market often operates independently from the rest of Latin America. However, it wouldn’t be surprising to discover a Nubank “mafia” already fostering new startups within Brazil.

These “mafias” typically concentrate on resolving previously unmet internal challenges or pursuing project concepts that weren’t fully realized within their former companies.

This approach often leads to quick initial successes, as the founders’ previous employer frequently becomes their first client.

However, as these regional tech giants expand and mature, their technological infrastructure requires improvement.

This necessitates superior, specialized third-party technical solutions, provided by startups like Truora – focused on fraud detection – and Mati, specializing in identity verification.

This technical evolution will likely stimulate further innovation at lower levels of the technology stack, exemplified by Vech Connect – a gig worker data API created by former Uber employees.

I am actively tracking and enthusiastic about these types of “pure technical” concepts, anticipating the continued growth of “mafias” in Mexico and throughout Latin America.

A Developing Funding Landscape

A notable pattern emerges as startups achieve success and their initial employee stock options fully vest – typically after a four-year period for companies funded by substantial American venture capital and adhering to standard Silicon Valley schedules. These now-vested early team members, having experienced company growth and seeking new ventures, often find support from their former colleagues.

This initial source of investment is incredibly significant. The presence of smaller angel investments with a patient outlook is frequently a missing component in establishing a thriving tech center – a resource that was previously limited within Mexico’s venture capital environment.

The Evolution of Mexican Venture Capital

Mexico’s VC industry is relatively young, approximately a decade old. It flourished under the administration of former President Enrique Peña Nieto, benefiting from substantial government funding directed both to startups and, indirectly, to VC funds and incubators through government contributions as a limited partner.

Following the 2018 presidential election in Mexico, this funding abruptly ceased with the change in political leadership. The impact of the new administration was a recurring theme in discussions with Mexican entrepreneurs.

Maturation Driven by Angel Investment

Despite shifts in government support, the ecosystem is maturing thanks to angel investments from these “mafias” and other sources. Aspects commonly expected by Silicon Valley investors previously presented challenges for founders in Mexico, but are now becoming more commonplace.

For instance, the YC SAFE (Simple Agreement for Future Equity) document – a standard term sheet for early-stage investments in Silicon Valley – was considered legally unusual in Mexico just three years ago. Currently, it is increasingly the standard for Mexican startups intending to secure funding from U.S. investors.

Furthermore, for companies focused on remaining within Mexico, a localized version called IMIET (Instrumento Mexicano de Inversión en Etapas Tempranas) has been developed and standardized to align with local corporate regulations.

Positive Trends in the Mexican Tech Sector

Although the total funding volume remains lower, there is now a greater availability of capital with the appropriate investment approach and timeframe. Coupled with instruments like the SAFE agreement, which streamline deal negotiations for entrepreneurs, Mexico’s technology ecosystem demonstrates a positive trajectory.

The Diversity Within Latin America

Previously, Mexico and Latin America have been referenced together, but it’s important to emphasize that Latin America is not a single, uniform entity.

Throughout my experience as an investor, I’ve closely observed the engineering capabilities across the region. The quality and concentration of this talent vary significantly between different Latin American nations, despite the increasing accessibility and affordability of technical skills acquisition.

Business practices and company development strategies also exhibit considerable variation, particularly when compared to Brazil, where these differences are most noticeable, and among the Spanish-speaking countries.

For those considering investment or expansion into Latin America, a crucial element for success lies in acknowledging and respecting these distinctions, rather than viewing the region as a whole.

The error of treating China, India, and Southeast Asia as monolithic markets has been made by many; applying the same approach to Latin America will likely lead to similar setbacks.

Although my recent trip focused on a limited number of products aligned with my investment criteria, the overall ecosystem is demonstrably evolving.

I anticipate a surge in unique Latin American innovation across all levels of the technology landscape in the near future. Emerging markets often demonstrate a faster pace of technological advancement than is typically predicted by those in developed economies, and Asia’s progress serves as a compelling example.