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Quick summary

• The US and Mexican tech worlds have been connected since the 1960s

• US-connected Mexican founders are at a clear advantage given their networks

• American VCs are flocking to LATAM to avoid replicating their relative absence from the Asian startup boom

A long-standing symbiotic relationship

In 1994, the implementation of NAFTA, a free-trade agreement between the US, Mexico, and Canada, opened the floodgates for increased trade and business between the US and Mexico. However, both countries’ tech sectors didn’t wait for NAFTA to start engaging with each other. Indeed, American companies such as Intel, IBM, and HP started venturing down south as early as the 1960s. Many of these companies set up manufacturing plants in Mexico, outsourcing manual work.

“Starting in the 1960s and continuing through the 1980s, a number of foreign companies—including Kodak, Motorola, IBM, Hewlett-Packard, and Siemens—placed some of their manufacturing operations in Guadalajara. This was all about finding cheap labor for manufacturing, and Guadalajara developed a cluster of tech companies that made semiconductors, printers, and photo equipment, among other basic components of the tech industry”. Jaime Reyes, who joined HP’s Guadalajara operation in the 1980s. - Smithsonian

Following the rise of China as the undisputed manufacturing hub a couple of decades later, American companies started outsourcing deeper engineering and tech tasks to their teams down in Mexico. In cooperation with local universities, cities such as Guadalajara and Monterrey became renowned for their excellent, and comparatively cheap, tech talent. Today, Guadalajara in particular is a center of tech excellence, with Oracle, Intel, and IBM all sporting Silicon Valley campuses in the city.

As US immigration rules tighten, Guadalajara is attracting tech talent from around the world looking to work for big tech companies without going through the hassle of US visas. Guadalajara is developing a niche in R&D, with national universities such as the Tecnólogico de Monterrey providing the city with tens of thousands of fresh talent each year.

“Guadalajara is a gem of the Latin American software industry and has become a cutting-edge city with a robust tech ecosystem. The state of Jalisco holds 40% of the IT industry in Mexico and 650 specialized companies providing 100,000 jobs to residents of the area.” - Source

The birth and flourishing of the Mexican startup ecosystem

The Mexican startup ecosystem started accelerating in 2006, when the so-called “TechBA” program invited 50 Mexican MBAs to Silicon Valley to learn about the startup world and experience the “startup way of doing business”, which runs contrary to many traditional business teachings. Two of the program’s participants, Santiago Zavala and Cesar Salazar would later come back to Mexico and become some of the ecosystem’s pioneers, creating the first incubator/VC initiatives aimed at supporting Mexican startups.

Following a relatively timid first decade, the Mexican startup ecosystem has recently taken on a whole new dimension. First and foremost, VC investment in the ecosystem ballooned, increasing by around 560% in the past five years. Even more impressive, Mexico has minted 8 unicorns in the space of two years, up from 0 at the beginning of 2020. Mexico also rode the euphoric 2021 VC wave, posting big funding numbers in all stages of the pipeline.

This recent surge in the size and weight of the Mexican startup ecosystem is the fruit of decades of work, but more importantly for the point of this article, the result of an entrenched relationship with the American tech ecosystem which we’ll explore in the next segment.

The US-Mexican connection

The confluence between America’s academic/corporate world and the Mexican startup ecosystem is best proved by concrete examples. To do so, let’s take a look at the relationship between the founders of some of Mexico’s biggest startups and the US.

Note: Only founders with US ties are listed, this is not an exhaustive list of the companies’ founders.

Kavak ($8B valuation)

• Carlos García Ottati: McKinsey

• Loreanne Garcia: Procter and Gamble, Stanford, McKinsey

• Roger Laughlin: Bain

Bitso ($2.2B valuation)

• Daniel Vogel: Stanford, Harvard, Quantcast

Clip ($2B valuation)

• Adolfo Babatz : MIT, PayPal

Konfio ($1.3 valuation)

• David Arana: MIT, Deutsche Bank (In NYC)

• Francisco Padilla: MicroStrategy (Listed American company)

Clara ($1B valuation)

• Gerry Giacomán Colyer: Yale, Stanford, Siftery, Bain

• Diego Garcia: Founded Bridgefy in San Francisco

The cross-pollination of talent from one ecosystem to another eventually led to Mexican founders using their American network and Silicon Valley’s startup gospel to launch startups in Mexico. Silicon Valley’s influence in the Mexican ecosystem is also notable in the development of legislation such as the Instrumento Mexicano de Inversión en Etapas Tempranas (IMIET), modeled after Y-Combinator’s SAFE document.

To summarize, many key players in the Mexican startup ecosystem have academic, professional, or cultural ties to the USA. Furthermore, it shows that while American VCs might be taking a risk on a new geography, they aren’t really taking a risk on founders’ pedigree, which is similar to the ones they fund in the US.

The corridor opens

A good analogy for the US-Mexico startup relationship is that of a corridor. The corridor took 40 years to be built, people started using it 15 years ago, and in the past 5 years, the corridor has become the hottest new attraction in town. Let’s take a deeper dive into why American VCs have scaled their investments in Mexican startups, and what makes it likely to continue.

On a purely pragmatic level, American VCs started arriving in Mexico when they saw the opportunities presented by some of Mexico’s later-stage startups. Mexico, whose capital is a 3-hour flight from San Francisco, represented a convenient and familiar “emerging market” for American venture capital investors to start “venturing” into. It is important to understand that Mexico’s geographical location and closeness with the US business sector amplify the subsequent reasons American VCs are interested in Mexican startups.

“World-class venture capital funds arrived in Mexico as local startups reached advanced stages and began looking for Series C and D financing. Some of these global funds are Softbank, Sequoia Capital, Andreessen Horowitz, Goldman Sachs, Temasek, DST, and Tencent. Before 2016, foreign VCs led practically no investments in Mexican startups.” - LATAMList

Following the first couple of American investments in Mexican startups, others started following suit, taking a closer and deeper look at the market opportunity. For some Silicon Valley VCs blasé by the newest dog food delivery service in the Bay, Mexico represents a market full of exciting opportunities, solving true societal issues instead of incremental improvements to a rich segment of the population. In the fintech sector, Mexico’s hottest, the simple equation of the unbanked population compared to the population with access to digital services makes the opportunity to invest straightforward.

“Approximately 40 million people in Mexico, almost a third of the overall population, are “unbanked”. Simultaneously, citizens are becoming more digitally inclined, creating an opportunity in the market for startups. Every year, the number of fintech users in Mexico increases. Estimations for 2023 predict that nearly 97 thousand people in Mexico will actively use these services” - Latam Startups

The Mexican startup ecosystem plays into American VCs wider plan of gaining a foothold in the LATAM startup market. Mexico, with its strategic location and population of 126 million, represents one of the test grounds for startups from all over LATAM to test if they are ready for international scale. Kavak’s recent expansion to Turkey and Oman shows that what works in the Mexican market can work thousands of miles away, making the market even more interesting. Being present in Mexico’s startup scene enables American VCs to identify and invest in the next LATAM and emerging market winners.

Lastly, American VCs might also want to avoid replicating their relative absence from the Asian startup boom, whose rewards were reaped by regional investors such as Temasek (Singapore’s sovereign wealth fund) and Soft Bank (whose Alibaba investment turned $20M into $50B). The demographic similarities between the Asian and Latino markets make it easy to spot similarities, and American VCs don’t want to miss out.

“Rappi (Colombia-based) now looks more like Meituan and Grab than any of its U.S. counterparts, and that’s not an accident. SoftBank, whose portfolio contains many of these Asian tech giants, invested heavily in Rappi’s previous two rounds and now has a $5 billion fund dedicated to the LatAm region. The knowledge and experience accumulated from Asian tech in the last 10 years is transferring to like-minded firms like Rappi, right under Silicon Valley’s proverbial nose.” - Interconnected

Conclusion

The links, trust, and familiarity between the American and the Mexican tech sector took decades to develop, starting with IBM’s first foray into Guadalajara. The cross-pollination of talent led Mexican founders to use their American network and startup teachings to launch their own ventures in Mexico.

Recently, the takeoff of the Mexican ecosystem, the country's strategic value in a wider LATAM play, and the pre-existing ties between both countries have led to American VCs flocking to Mexican startups. The potent similarities between Asian startups, which American investors have largely missed out on, and Latino ones make Mexican startups a must if American VCs want to hop on the next bandwagon of emerging market-focused unicorns.

The Mexican startup ecosystem is one of the most exciting ones to come out of emerging markets. The flywheel is well underway, and Mexico is becoming a litmus test for LATAM’s startups to battle-test their ideas. If you’d like to learn more about the ecosystem in-depth, feel free to check out my piece on the topic right here.

The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories from our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with colleagues :)