Analysis: Ecosystems in Peru and Ecuador still fail to turn startups into unicorns

RIO DE JANEIRO, BRAZIL – According to research by venture capital firm ALLVP, these countries, unlike other Latin American nations, only have no more than two candidate companies that aspire to a valuation of more than US$1 billion.

The reasons? The gap in access to financing, little or no government support, and more innovation-heavy ventures.

Latin America has become the cradle of startups that in the last year -many of them driven by the pandemic- have managed to take that longed-for leap and become unicorns.

According to a survey, conducted by The News website, the list of the most valuable startups in Latin America is topped by Brazilian Nubank, which is valued at US$40 billion and has a big lead over second-place real estate startup QuintoAndar, also Brazilian, whose market value is US$4 billion, tied with Mexico’s car sales marketplace Kavak (US$4 billion).

Subsequently appearing are Colombia’s delivery giant Rappi (US$3.5 billion), Brazilian mobile game maker Wild Life (US$3 billion), real estate startup Loft, also Brazilian (US$2.9 billion. ), Mexican crypto broker Bitso (US$2.2 billion), Brazilian C6 Bank (US$2.1 billion), Brazilian crypto broker Mercado Bitcoin (US$2.1 billion) and Brazilian lending platform Creditas (US$1.7 billion).

But also Ualá, Aleph, Mural, or Nuvemshop, from Argentina, and Clip, from Mexico or Notco, from Chile are worth mentioning.

A study by the venture capital firm ALLVP reported on the club of so-called “soonicorns” – Latin American startups with the most significant potential to become unicorns soon.

The report considers companies founded after 2012 with a valuation of more than US$100 million or that in their last investment round have raised more than US$20 million in capital. The list of other ventures that could be the next unicorns is long.

However, the story in Ecuador and Peru is different. Ecuador has only one startup focused on the world of unicorns (the fintech Kushki), while Peru has two options: the edtech Crehana and the food marketplace Favo.

In the case of Ecuador and Peru, both have ecosystems with similar characteristics that have postponed the generation of startups with unicorn paste.

“Ecuador’s entrepreneurship ecosystem is in an initial stage, and we lack some factors to have unicorn or soonicorn companies, in this case. On the one hand, we do not have so many organizations to support entrepreneurs such as incubators, scaling, mentoring programs and support for the development of knowledge and skills of entrepreneurs, which are so important for their startups to succeed,” said Justin Schwartz, managing partner of the investment fund Impaqto Capital, to America Economia.

On the other hand, the executive says that the venture capital industry is tiny. “We only have five venture capital funds of different types, all are small. Some invest in Ecuador and others in the region. There is a gap in access to capital for early-stage startups. Another point is that Ecuador is a small market; a startup cannot succeed or reach the unicorn level just by focusing on this country,” he added.

For Mauricio Andújar, CEO and co-founder of the digital transformation agency Liquid, the Peruvian entrepreneurship, and innovation ecosystem is immature and still lacks time to reach the level of others, such as the Chilean or Colombian.

“In the Chilean ecosystem, Startup Chile and the Corporación de Fomento de la Producción (Corfo) are two government vehicles that have made this dynamic. In Peru, in the last two years – with pandemic and political and economic crisis in between – government support has slowed down. Programs such as ProInnóvate have frozen aid, and there are no new generations of startups, which is a cause for concern. There are not so many new ventures emerging, and I hypothesize that this is happening because there are not so many incentives for that to happen,” he said.

In addition, Karen Montjoy, coordinator of entrepreneurship and innovation of the Innova ESAN incubator, says that tax benefits are also necessary for more investors to invest in the ecosystem, to make alliances with incubators and international events that promote entrepreneurship.

However, for academics, the main barrier is the lack of access to capital. “There is a high level of risk that is linked to startups. In addition, it should be considered that the first five years of this type of company are usually quite illiquid,” she says.

Ecuadorian Ernesto Kruger, the founding CEO of Kruger Corporation, a company specializing in innovation and digital transformation, points out that the financing barrier occurs in the early stages of companies, which require seed capital and angel investment to get off the ground.

“These requirements may be covered suddenly, but in the long term, venture capital is difficult, and most successful entrepreneurs go in search of investors in other markets such as the American market. They used to do it in the Chilean market,” he said.

Financing is key to achieving international expansion, an essential element for any startup seeking to become a unicorn.

“The only way that a startup born in Peru can eventually be part of this club of unicorns or startups with the potential to become one, is to leave Peru, which is a small market. This country is attractive and functional to test business models, for the venture to find the product-market fit, but it has to leave quickly to achieve scale”, says Mauricio Andújar.

In this regard, Justin Schwartz refers to Kushki, which already operates in five countries. “Startups need to have that regional vision and ambition so that they can dominate the region and not just stay in Ecuador. Kushki is a great example of the Ecuadorian soonicorn because it had that regional vision from the beginning. Fintech put the country on the map for foreign investors, and that is important because 80% of the venture capital invested in Latin America goes to Brazil and Mexico. For small markets, it means a great effort to attract capital and educate investors that there are interesting opportunities in these countries,” he says.

UNICORN PROFILE

But beyond the factors of an ecosystem that helps startups transition to unicorns, what do they need to have to achieve it?

For Debbie Jaffe, managing director of Endeavor Peru, an organization that supports high-impact startups, the soonicorns mentioned by ALLVP, especially those in Peru, are “built for scale” or created from day one to scale in terms of size and technical infrastructure, but also in terms of the market.

“In the case of Crehana, an edtech platform, it had the entire Spanish-speaking market at its disposal. Other products or services have to do with regulatory or logistics issues, such as e-commerce or quick commerce. It’s not insurmountable, but they have to think it through. What do they need to succeed? Resources at an early stage to grow, cross border talent, as Favo does, which has a lot of talent in Brazil, capital (international that we see with Crehana) and support in early stages such as mentoring,” she said to America Economia.

In that sense, according to Karen Montjoy, there is an urgent need to attract talent and specialists in science and technology to the country and apply it in local companies. “Access to specialized human talent and high-tech laboratories is required. Also, the State must encourage academia and other actors to work together. In that sense, there is a lack of greater linkage and investment in the ecosystem,” he says.

For Mauricio Andújar, there is a lack of more innovative ventures. “They must challenge existing solutions to problems that are not yet solved. A venture will likely validate its model in Peru, quickly go out to other markets and eventually be successful, but not attractive enough for capital funds, where investors are looking to invest in ventures that create and redefine business models,” he says.

What the specialists consulted do affirm is that there are more candidates with great potential. In the Ecuadorian field, Ernesto Krugman bets on the cybersecurity company Kriptos, while Justin Schwartz, on the educational management platform Idukay.

On the Peruvian side, the last-mile startup Chazki meets several requirements that profile it like a unicorn, according to Karen Montjoy. Mauricio Andújar, on the other hand, highlights the health tech Smart Doctor, the edtech Prendea and the corporate wellness app Life Fitness Pass.

It is a question mark how soon Peru and Ecuador will see the birth of their first unicorns. The only certainty is that this could be considerably shortened, since this will depend on creating vehicles and incentives that help startups take off and make them attractive to investors.

With information from America Economia