Ecosystem Deep Dives #25: Argentina - Constant Paradox
Ecosystem Deep Dives #25: Argentina - Constant Paradox
While the country seemingly has everything it needs to succeed, deep-rooted institutional glitches still hinder it from reaching its full potential.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Regional pioneer
Argentina was LATAM’s quintessential tech spot in the 90’s. During the decade’s tech bubble, most of LATAM’s VC funding went to the capital city of Buenos Aires, giving birth to pioneering Argentinian successes such as Globant, Despegar, and arguably the continent’s most successful start-up to date, MercadoLibre.
The fact that Argentina was the indubitable trailblazer in LATAM’s start-up emergence while simultaneously being associated with catastrophic economic management points to the “constant paradox” referred to in the article title. A country that seemingly has all the tools it needs to succeed, but yet can’t seem to get rid of its chronic case of inflationary disease. I believe the recent boom of the Argentinian start-up ecosystem might provide a sliver of hope, or at least, another way of looking at problems.
Indeed, the Argentinian start-up ecosystem has started to capitalize on the strengths its country has to offer. A cosmopolitan and high-quality talent pool, a strong connection to global tech giants, and a true desire to tackle old problems with new tools (ie:crypto) all make start-up opportunities rife in the land of the gauchos.
A roaring 2021
2021 marked a true shift in the scale of the Argentinian start-up ecosystem, with the ecosystem adding 6 new unicorns to its mix and venture financing (Series A and above) reaching $2.1B. Observed across a majority of emerging market start-up ecosystems, the 2021 VC funding boom was fueled by a variety of factors including post-pandemic digital adoption and pandemic-induced VC internationalization. Local business angels also ventured into start-up funding, bolstered by the unattractiveness of “traditional” investment options during that period.
It is interesting to note the calibre of the six “class of 2021” Argentinian unicorns, as they say a lot about the country’s start-up makeup as a whole. New additions to the Argentinian unicorn club include Bitfarms, a cryptocurrency mining start-up, Ualá, a neobank, and Vercel, a collaborative front-end design tool for developers.
This “unicorn variety” speaks volumes to the maturity of the ecosystem, certainly propped up by the first wave of successful Argentinian founders now getting involved with the ecosystem in mentorship or investor roles. Cases in point can be found in Newtopia VC, Endeavor, or 17Sigma, initiatives founded or led by successful Argentinian founders set on giving back.
Ecosystem layout
As the country’s capital and financial heart, Buenos Aires is unsurprisingly the center of the Argentinian start-up scene. However, other cities such as Cordoba, Santa Fe and the wine-capital of Mendoza also foster an active entrepreneurial scene. In terms of renown incubators, one could cite Endeavor, Emprelatam and GridX as some of the main ones, alongside a plethora of co-working spaces operating throughout the country.
On the legislative side, Argentinian lawmakers passed two seminal policies that have been heralded as true advancements by the start-up community. The first is the 2017 Entrepreneur’s Law, passed by former President Mauricio Macri. The law ushers in the creation of a new legal figure, the Sociedades por Acciones Simplificadas, which essentially provides the basis for bureaucratic simplification, tax breaks and a variety of logistical streamlining in matters such as equity. However, this advancement is under attack by the newly-elected government who considers this structure to be used for criminal matters.
The second advancement is the so-called “Knowledge Economy Law”, which aims to boost the competitiveness of Argentinian companies involved in the development of intellectual property such as new software.
“New benefits include reduced labor costs, fewer restrictions for company creation, export incentives, among other advantages, for “intellectual” industries. These range from computer science, AI, aerospace, nanotechnology, biotechnology, geology, audiovisual, among others.” - Source
Main specialties
A quasi-constant in Argentina’s economic history has been the inflation plague, aptly personified by the country’s never-ending story with the IMF. Argentinian inflation is caused by a variety of factors (fiscal deficit being a prominent one) which I won’t expand on. What interests me is the way in which the country’s economic quagmire has given rise to one of the most active crypto ecosystems in the world.
Argentinian crypto start-ups generally have a pretty clear value proposition: protect yourself from inflation by saving and spending in cryptocurrencies such as Bitcoin or stablecoins (cryptocurrencies pegged to a fiat currency such as the US dollar).
The overt use case Argentinians have for crypto has given rise to a vibrant national crypto scene, turning Argentina into a somewhat real-life laboratory for the societal use of crypto. The city of San Martín de los Andes in the region of Neuquén has even been named Argentina’s “crypto valley” after birthing two of the country’s hottest crypto start-ups in the form of Lemon and Buenbit. Decentraland, one of the main players in the cryptic “metaverse” market, is also an Argentinian creation.
Going hand in hand with the crypto scene, the Argentinian fintech start-up scene is one of the country’s other main sector of innovations. Local champions include neobank Ualá, blockchain-powered credit network Ripio and open banking start-up Pomelo. Another notable player in the fintech space is Mercado Pago, the digital payment platform launched by Mercado Libre. The ecommerce giant isn’t the only big LATAM start-up to venture into fintech, with Colombian unicorn Rappi launching its own financial product through RappiPay. This trend is so evident that Platzi, a Colombian edtech start-up, even made an April Fool’s joke out of it.
Other notable sectors Argentinian start-ups innovate in include biotech, edtech, B2B software and agtech to name a few. A traditional pillar of the Argentinian economy, agriculture, has long needed innovation from crop management to marketplace connections. Still nascent, the Argentinian agtech potential is probably one of the country’s most untapped start-up potential.
“Considering that 4 out of every 10 dollars exported by Argentina in 2019 were generated by corn, wheat and soybeans, the country has a great opportunity to promote the sector through the growth of startups that provide technological and research solutions to optimize processes and design innovative strategies different from traditional agriculture.” - Endeavor “Agtech en Argentina" report
Argentina’s advantages
Albiceleset start-ups have a number of advantages they can rely on, and that give them an advantage over other countries in the region.
Human capital, and the cosmopolitanism of that human capital, is arguably the ecosystem’s greatest strength. Solid academic institutions such as the University of Buenos Aires, which is free for other MERCOSUR country residents, and ITBA, a private university from which emanate a lot of Argentinian unicorn founders, provide the country with a qualified talent pool (which has unfortunately often left for better opportunities abroad). Additionally, Argentina’s population sports the highest level of English proficiency out of any other LATAM country, making it highly attractive to foreign corporations. Today, not only do both Microsoft and Google have a presence in the country, but they also run their respective local start-up support programs.
“We decided on Argentina by analyzing the quality of its university education. We usually employ young people who have a good education; We reviewed our options, and Argentina seemed the best possible business decision. When we analyzed, we saw that the country has outstanding universities, which is a reasonable basis for us; we rely heavily on universities. The government gave us much support in this, too” - Google’s Eric Schmidt in an interview with Argentina’s biggest newspaper La Nación
It is interesting to see how the quality of the country’s tech talent trickles down into the types of start-ups being created. Indeed, 72.7% of Argentina’s start-ups operate on a B2B model, indicating a certain level of technical expertise on behalf of the founders. A common arrangement for these B2B Argentinian companies is to have the management team be in the US, enjoying the legal and economic climate, while the development team is in Argentina, enjoying the high-quality yet cheap talent pool. Argentinian unicorns AuthO and Mural is a perfect example of this set-up.
Lastly, the ecosystem’s early, successful strides into tech entrepreneurship starting in the 1990’s has given the ecosystem time to mature, and has given it the time window necessary to enable former founders to give back to the new generation. For example, both Mercado Libre and Globant (both public companies) founders, Marcos Galperín and Martín Migoya, are part of the Endeavor Argentina board of advisors.
Weaknesses
Following the title of this article, Argentina comes with its paradoxes, which often act as an unfortunate counter-balance to the wealth of opportunities the country is full of.
The first is undoubtedly the unstable macro-economic situation, which makes it hard for one to make long-term plans. With VC returns averaging seven years, many of the most successful founders make the choice to headquarter their company abroad in order to protect themselves. That foreign headquarter arrangement also helps to assuage investors’ fear of investing in Argentinian start-ups, betting more on the company and the market itself rather than the country’s economy as a whole. In Pakistan for example, foreign VC investment has recently rocketed due to the government’s authorization of foreign holding companies.
The country’s persistent economic stagflation, which has also led to severe brain drain, is inextricably linked to Argentina’s Manichean political sphere, making political compromise difficult.
“According to those who voted for the opposition, grouped under the Juntos por el Cambio banner, the problem is Peronism and Juan Domingo Perón, who became president for the first time in 1946 and pursued a series of reforms that empowered the working class and consolidated rights and a rigid labor system. According to the wide array of those who call themselves Peronists – most of whom voted for the ruling Frente de Todos coalition – the conservative classes always conspired against popular and progressive governments, generating the conditions for political and economic instability in order to protect their oligopolies.” - Forbes
Conclusion
To summarize; the main weakness Argentina’s start-up ecosystem has to face is the persistently unstable political and economic climate that isn’t conducive to the long-term thinking necessary to build a solid start-up ecosystem. Apart from that, Argentina has all the tools needed to succeed.
PS: I’m currently working on my most extensive piece yet, as I’ll be covering my home country of France. For that reason, the next episode of Ecosystem Deep Dives will be on May 10th instead of May 3rd!
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!