Ecosystem Deep Dives #29: Peru - Late Bloomer
Ecosystem Deep Dives #29: Peru - Late Bloomer
After a late start due to a historically import-driven tech sector, the Peruvian startup ecosystem is finally heating up.
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!
A difficult start
The Andine country of Peru went through difficult decades in the 70’s and 80’s, marked by periods of extreme violence and subsequent economic catastrophe. After finally opening up its economy in the 90’s, the country is still reeling from the talent lost during its tumultuous years, a price its startup ecosystem is still paying today. While still flawed in many ways, Peru is seen as a 2010’s economic success, drawing comparisons to its Bolivian neighbor.
While startups might not be the priority of the newly-elected Peruvian president (far-left on the political scale), the country’s ecosystem has been greatly vitalized in the past decade, beginning in 2012 to be precise. Indeed, that year marked the launch of Startup Peru, a state-financed and state-led startup accelerator. This model, strongly inspired by the success of Startup Chile, is often necessary in countries where severe brain drain and lack of conglomerate innovation stifle the emergence of a national startup ecosystem.
In the same spirit of state-impulsed innovation, COFIDE (Peru’s development bank) launched a “fund of funds” program, aimed at financing the creation of local VC’s. These fund of funds initiatives can be a game changer in countries with a lackluster VC scene resulting from frisky institutional investors. A case in point of this ‘fund of funds’ initiative is Greece, where a large part of the country’s successful VCs were born out of the Equi’Fund program.
Current market and successes
The need for Peruvian startups mostly emerges from the rise of the Peruvian middle class, which jumped from 17% of the population in 2004 to 43.6% in 2019. Although that percentage dropped sharply during the pandemic, this segment of the population is often economically active, yet underserved by a variety of services. This represents an opportunity for startups in almost all sectors, from fintech to healthtech riding on covid-induced digitalization of the general population. Furthermore, the quasi-ubiquitous availability of phones bought on by cheaper Chinese brands and the black market also make the dissemination of startups’ services easier.
“The response to the unfulfilled demand of the emerging middle class becomes the foundation of the Peruvian startup ecosystem” - Myriam Lazarte, CEO LatAm startups
Today, one of the Peruvian ecosystem’s main focus is edtech with the country’s most successful startup to date, Crehana, leading the pack. Crehana, which offers online courses on a variety of topics related to the digital job market, is a representative case of a where Peruvian startups can thrive.
In Crehana’s case, that consists of proposing an alternative to one of Peru’s infrastructural problems (outdated higher education) to the relevant target audience (new, tech-savvy middle class) riding on a generational switch (democratization of e-learning). Out of the $124M raised by Peruvian startups in 2021, Crehana’s Series B represented more than half that number. The LATAM edtech sector is a particularly promising one from an impact and economic perspective, as potential acquisitions between regional players such as Platzi (Colombia), Crehana (Peru), or Descomplica (Brazil) to name a few examples could add liquidity to the startup market while upskilling millions of people in the process.
The Peruvian fintech sector is another point of interest, with startups offering a plethora of services ranging from online lending to remittances. Once again, the fact that fintech solutions are direly needed (and oftentimes similar) across LATAM makes the case for not only a great local startup, but also a great exit as regional leaders seek to gobble you up. The fintech sector also has the advantage of having conglomerate financing or support, often out of banks’ sheer fear of getting disrupted. In Peru, one of the country’s biggest financial conglomerates, Credicorp, launched its own VC arm that goes by the name of Krealo. Krealo has been looking outwards, with investments in Chile and Colombia on top of their Peruvian activities.
Some analysts also note that Peru could develop a specific moat in foodtech, as the country is one of the world’s most extensive producers of the praised and trendy ‘superfoods’.
Still road to go
While VC and startup activity in Peru has dramatically increased in the past couple of years, in line with the rest of the region, the country’s ecosystem is still in a developmental stage and thus fragile. I’ll abstain from any political commentary, but the recent election will probably not place Peruvian startups at the top of the agenda. For an ecosystem that has, understandably, relied on public money to start with, achieving self-sufficiency is now key.
To do so, the country needs larger and more educated networks of angel investors, as well as a more plentiful VC scene that can only be financed in concert with the country’s large institutional investors. One of the key steps to unlock that is to get local HNWIs (High Net Worth Individuals), traditionally loyal to real estate investments, to see startups as viable financial opportunities. Local VC’s able to provide follow-up funding to founders without needing to fish abroad would also be beneficial. The ecosystem could also work to stimulate diaspora investment into local startups.
Furthermore, due to its youth, the Peruvian ecosystem still suffers from low international visibility, a problem also faced by Bangladesh. Indeed, both countries have the ‘golden trifecta’ required to boost their ecosystem (growing middle class + outdated services + covid-accelerated digitalization) but lack a spearheading success that puts the national ecosystem on the map. In Colombia’s case for example, Rappi’s rise was fundamental in attracting foreign VC’s to the Colombian startup scene.
I have observed three distinct waves of startup ecosystem development in Mexico, Colombia, Chile and Peru. The first wave starts with the support of local governments, which have laid a necessary foundation by offering grants, providing visibility and congregating key actors in order to stimulate a dynamic ecosystem effect. The second wave crests when venture capital funds begin to crop up and success stories are shared of startups that are able to raise capital from international investors . Finally, the third wave is the inflection point of consolidation, when startups led by serial founders have the backing needed to break out and become regional companies worth more than $100M.” - Greg Mitchell, Managing Partner @AVP
Structural weaknesses
The Peruvian ecosystem, like many other emerging markets, suffers from a chronic shortage of relevant tech talent able to carry out the work startups need to grow. This is due to brain drain, in part, but also to a traditionally reactive Peruvian approach to technology that has disseminated amongst the country’s tech minds. However, this point can be nuanced by Peruvian’s familiarity with entrepreneurship, as SME’s are widespread.
“A confluence of factors has conspired against the minting of “experienced” startup CTOs: improper education, a sui-generis IT corporate industry heavy on proprietary solutions and custom implementations, lack of experienced role models, the “brain drain” caused by attraction of opportunities abroad, plain economics and the mindset that these factors have created.” - Observations of the Peruvian startup ecosystem by Eddie Wong
The country still needs to deal with simplifying its business procedure and streamlining unnecessarily heavy bureaucracy, which always hinders founders. The new government and its political leanings may make it harder for local founders to convince foreign investors to take the plunge. Furthermore, 67% of Peruvian startups that raised in 2021 did not have a female founder in their team. Needless to say that needs to change.
Conclusion
One of the best startup ecosystems to compare Peru to is Bangladesh. Indeed, I believe both countries’ ecosystems are on the path to being able to stand on their own feet, a step dependent on the breath of local angels, sensible government legislation, and a true strategy to train/recruit relevant talent.
In Peru’s case, an interesting point can be made in relation to state-impulsed startup ecosystems. As was the case in Chile and France, the Peruvian startup scene truly took off once the government decided to not view startups not as SME’s but rather as a specific type of asset class requiring its own legislation, financial instruments, and institutional support.
A word isn’t utilized in the startup world enough: patience. Ecosystems take time to develop, and the tipping point is often flocks former, exited founders reinvesting their time, skills and networks back into the ecosystem. Peru should get there eventually.
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!