Ecosystem Deep Dives #3: Colombia - Rise of the phoenix
Ecosystem Deep Dives #3: Colombia - Rise of the phoenix
How Colombian start-ups are reinventing the country after decades of war.
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Introduction
Similar to the DRC, Colombia suffers from a bad image on the international scene, mostly fueled by Western romanticization of the narcotrafficking years epitomized by Pablo Escobar. Although still prone to drugs and paramilitary problems, Colombia is a radically different country now than it was twenty years ago. Cities such as Medellín went from being named "murder capital of the world" to a hype city for techies and digital nomads. Bogotá was just voted the second most entrepreneurial friendly city in Latin America. The country's poverty rate (people living with less than $5.5/day) dropped from 61% in 2001 to 29% today.
With a population of 51 million, 80% of it living in urban areas, a smartphone penetration rate of 72%, access to the Pacific and Atlantic, as well as a growing middle class, Colombia is now the third largest economy in Latin America. It is notably one of the only Latin American country whose currency, the Colombian peso, hasn't undergone destructive hyper-inflation, contrary to Argentina or, infamously, Venezuela. While previously boasting one of the largest corporate tax rates in Latin America, new governmental measures have sought to relieve businesses fiscal responsabilities in order to boost entrepreneurship in the country. The Colombian start-up scene, fueled by talented young Colombians, increased involvement from foreign investors, and governmental efforts to support the sector, have laid the ground for one of the fastest and most promising emerging market ecosystems. Colombian start-ups have the added advantage of enjoying a large enough domestic market with which to start with, while also having access to the large Mexican and Brazilian markets should they decide to expand.
Colombia's complicated history, a 60 year long civil-war, has forced generations of Colombians to be resilient and resourceful. These values, shared by Colombians of all generations, are proving to be extremely useful in the context of entrepreneurship. One can draw a strong parallel with Palestinian founders, who have also developped a toughness and extraordinary creativity as a result of the situation they are forced to live in.
State of the ecosystem
While too early to be considered mature, the Colombia start-up ecosystem cannot be considered "nascent" anymore, as a result of its impressive funding numbers ( $1.1 billion in 2019, growing YoY), imposing rounds raised by Colombian start-ups (Rappi: $500M; $2BN total, LaHaus: $35M; $158M total, Elanas: $6M; total $8.5M), and good international ranking (22nd most entrepreneurial friendly country worldwide). While the ecosystem is largely focused in Bogotá, the capital, other cities such as Medellín, Barranquilla and Cali are enjoying steady growth in their local start-up ecosystems. The switch from "new" to "growing" ecosystem is starting to be reflected in the way different actors from the ecosystem envision the future. As stated by Felipe Santamaria, co-founder of Rockstart LATAM;
"Colombian start-ups no longer need inspiration, they need capital, networks, knowledge and support in building their future great companies" - Felipe Santa Maria, co-founder @Rockstart LATAM
As for the main sectors Colombian start-ups innovate in, the indisputable winner is fintech (financial technology). In a country where financial exclusion, a byproduct of the informal economy, has traditionally been sky-high, Colombian fintech entrepreneurs generally find a market for their financial innovations. The Colombian fintech sector has the specificity of innovating in "financial inclusion", not just "disrupting" exisiting banks. As a result, 76% of Colombians use some kind of fintech service, the highest rate in Latin America. The Colombian fintech sector is also organized, with initiatives such as Colombia Fintech that collaborate and lobby to advance financial innovation. Today, there is an estimated 220 fintech start-ups in Colombia, with that number growing YoY. Some notable examples (non-exhaustive list) of Colombian fintech successes are:
Valiu: A mobile remittances service that enables Bitcoin-backed cross-border payments in Latin America. (just raised $5.25M)
Tpaga: A mobile wallet for unbanked consumers in Latin America. Currently in Colombia and Mexico.
Zinobe: Develops online financial products for the consumer and small business sectors.
Other sectors Colombian start-ups are thriving in include:
Proptech: Technology relating to real estate. According to Start-Up Genome, there are 60 proptech start-ups in the country, with those type of start-ups growing an average of 170% in 2021.
E-commerce: High and growing internet penetration, combined with the population's growing purchasing power, make this sector ripe for innovation. The number of items purchased online grew 259% between 2012 and 2018. Obvious examples include Rappi, Colombia's first unicorn, and Laika, an e-commerce platform for pets, which just raised $12M. While the e-commerce sector is growing, it isn't void of criticism, especially regarding the treatment of workers in the gig economy.
Logistics: The under-development of the country's transporation infrastructure has given rise to interesting disruption in the sector, such as Cubbo, a technology company that fulfills e-commerce orders for direct-to-consumer brands.
Edtech: The relative gap between what traditional universities teach their students and the actual needs of the 2021 digital job market has led to innovation in education. My personal favorite is Platzi, an online school offering classes ranging from blockchain, to coding, to digital marketing.
In addition, Colombia boasts what many call "copycat" start-ups, in other words, replicas of start-ups that have worked in western markets (think food delivery or ride-hailing start-ups). While this is often critizised as a lack of creativity, I disagree. If these "copycat" start-ups are successful, it's because they are solving a real, local problem, and that should be applauded. In addition, if it were that easy to do, the "original" companies would've overtaken emerging markets by now. These so-called "copycat" start-ups bring innovation in their business model by adapting a proven concept to local conditions. To take the ride-hailing example, one can think of SafeBoda, a Ugandan start-up that allows users to order motorcycle rides through their phone. Not only that, SafeBoda drivers receive training, safety equipement, and a formalization of their professional activity. Some might call SafeBoda a non-creative Uber clone, but I see it as a fundamentally revolutionary product, with pre-existing market validation, adapted to the Ugandan/Kenyan market. Of course, start-ups in emerging markets shouldn't ONLY be copycats, but I don't see why entrepreneurs wouldn't take an opportunity where they see one. For a Colombian example of this, one could mention Picap, a motorcycle-hailing app which used to complete almost 2 million rides monthly before getting slowed down by regulatory issues.
Lastly, an interesting point about the Colombian ecosystem is the fact that many of the country's most successful start-ups such as Rappi and Platzi went through the famous Y-Combinator program in San Francisco, leading to more Colombian start-ups taking that route. It's been interesting to see the more international outlook YC has taken, facilitated by the fact they now offer fully-remote programs.
Why foreign investors like Colombia
One of the Colombian ecosystem's impressive feats has been managing to attract foreign investors into a country with a severely damaged reputation. Initiatives such as Invest in Bogota have been instrumental in not only attracting foreign investors, but also shifting the paradigm about the country on the international stage. Important pro-start-up and pro-investor legislation such as the "Ley Naranja" (covered later in the article) are all contributing to increased foreign investor interest in Colombian start-ups. Another important selling point for foreign investors, although not specific to Colombia, are the tangible problems that LATAM start-ups aim to solve. While Silicon Valley start-ups may be developing the next, $10,000 smart fridge, which is accessible to a tiny fragment of the general population, LATAM start-ups are solving important societal, economic and environmental issues. As Shu Nyatta, managing partner for SoftBank LATAM says:
"There’s so much to build for so many people and businesses. In San Francisco, the venture ecosystem makes life a little better for individuals and businesses who are already living in the future. In LatAm, tech entrepreneurs are building the future for everyone else." - Shu Nyatta, Managing Partner @SoftBank LATAM
This new approach to investment, often referred to as "impact investing", which looks at impact and profit instead of solely profit, is set to become mainstream in a decade or so. The new generation's hyper-awarness of global issues will make investing in destructive, profit-only start-ups outdated and shunned down upon. Combined with potentially lucrative business opportunities bought about by the middle class's rising buying power, as well as growing internet penetration and financial inclusion, innovative LATAM start-ups will surely continue to attract more funding. VC funding in LATAM is currently exploding, with Q2 21' funding already surpassing the entirety of deals closed in 2020.
The role of the government
The Colombian government has also started getting involved in facilitating and boosting the Colombian ecosystem. In this section in particular, we will look at current initiatives and the notable laws passed by President Ivan Duque in light of his government's 2018-2022 National Development Plan. As President Duque is controversial at home, I will not take sides on his policies but rather factually state what has been done for start-ups in Colombia.
Ivan Duque's National Development Plan for 2018-2022 has, as a main objective, to get Colombia's economy to grow at a 5% rate, year over year. To do so, his government is banking on what is referred to as the "economia naranja" or "orange economy", which includes creative industries that lead to the creation of intellectual property. This includes arts, music, and software just to name a few. The vision behind support for the orange economy is to grow the Colombian economy by essentially exporting the talent and creativity of the Colombian people instead of solely relying on natural resouces.. The orange economy isn't a far-fetched theory: the sector is growing 7% YoY, and is triple the size of the Colombian coffee sector.
While the orange economy encompasses way more than simply the start-up sector, for the sake of this article we will focus only on laws and initiatives relating to the development of start-ups in Colombia. To summarize, Duque's government main goal with these laws is to: reduce taxes on the productive sector (which means increasing personal taxes), stimulating entrepreneurship, simplifying tax laws and create jobs. Here are a few examples:
Passed in 2017, the "Orange Law" aims to facilitate and encourage entrepreneurship in the country. Here are 5 main advantages offered by the law:
Creation of credit lines for creative ventures
Execution of the financing law (heavy tax cuts for start-ups during beginning years)
Consolidation of the "Created in Colombia" seal (aimed at giving start-ups with the seal more international legitimacy)
Programs to strengthen entrepreneurs (variety of entrepreneur support programs)
Promotion of training in disciplines considered cultural and creative.
Passed in 2020, this law target start-ups as well as SME's. It is centered around 5 axes:
entrepreneurial skills
access to finance
networks of commerce
tech and innovation
institutional architecture
Some of the main advantages include:
differentiated rates and simplification for the creation of ventures.
access facilities to the public procurement market for SME's
facilities for obtaining resources and encouraging better conditions for entrepreneurs to access financial instruments.
updating the regulatory framework around the institutional framework for entrepreneurship.
Implementation of measures that mix the educational system with the entrepreneurial ecosystem, from the first years of school to university.
Different initiatives
The Colombian govermnent as well as local municipalities have also started their own initiatives aimed at strenghtening local entrepreneurial ecosystems. Two of the most notable examples include:
Ruta N (Medellín)
Contains innovation lab, financing opportunities, social entrepreneurship support....
Grants, support, incubating and investor presentation for Colombian start-ups and SME's.
While the Colombian government is taking measures to facilitate entrepreneurship in the country, most of the credit for building the Colombian start-up ecosystem goes to the sweat, blood and tears of Colombian founders. They have paved the way and should be credited with the recent success of the ecosystem.
What's left to do
While outside foreign VC investment is steadily rising in Colombia, the country lacks a strong ecosystem of early-stage, local investors. This characteristic is what makes Silicon Valley so powerful, as a founder with a good idea and a bit of traction can raise their first round from someone living 15 minutes away. In Colombia, the scarcity of local angel investors forces start-ups to look abroad, which takes more time and involves more paperwork. This might be due to the still relatively new state of the ecosystem. However, with the success of Rappi and other large Colombian start-ups, the ecosystem is starting to experience the "PayPal Mafia effect", through which successful founders give back to the ecosystem or create entirely new things. This will definitely exponentially increase the number of local angels in the upcoming years.
Platzi founder Freddy Vega (we don't agree on the copycat start-ups but I love this guy) made a video about why he believes start-ups in LATAM have a hard time succeeding. Some of the reasons he states are:
Lack of capital, especially the reluctance of LATAM-based investors to invest in innovation.
Discrimination against LATAM founders
Weakness of LATAM payment ecosystem and fraud
Not enough govermnent involvment + bureaucracy (problem for B2B)
Entrepreneurial mediocrity
Conclusion
The Colombian start-up ecosystem is applaudable on many fronts: most of its start-ups are solving real, societal issues and are addressing problems govermnents have ignored for decades. For a country with a terrible international image only a decade ago, Colombia has completely rebranded itself as a young, enthusiastic and innovative country, thanks in large part to the country's start-ups led by young visionary founders such as Freddy Vega. It is important to note that growing start-up ecosystem does not mean the entire country is doing better. Recent protests and events of police brutality in Colombia show that investing in start-ups are nowhere near a panacea to a country's woes.
While foreign investment is coming in, efforts are needed to stimulate the local, early-stage capital angel investor scene in order to multiply the odds of successful start-ups being created. The country still faces a plethora of environmental, social and infrastructural problems, meaning founders won't run out of problems to solve anytime soon. All in all, Colombia, is bound to become a LATAM start-up powerhouse in the next decade, as successful Colombian founders from the 2010's start diffuse their knowledge and capital into the next generation.
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