Mexico in 2013 is Brazil in 2008

By M. Chris Johnson , written on February 26, 2013

From The News Desk

News flash: Brazil’s tech boom peaked on October 16th, 2012. That was the day that Fast Company published the first half of a breathless two-parter, on Norte-Americanos ditching jobs in New York to chase the dream in the Land of Order and Progress.

The article told of Ivy League MBAs leaving America behind to found (and join) tech startup companies focused on Brazil’s nearly 200 million consumers. Indeed, there have been quite a number of these stories, the most famous of which was, founded by former Harvard and Wharton MBA students Kimball Thomas and Davis Smith in late 2010.  Thomas and Smith built a clone of into a property that became one of the foundational companies of the Brazilian Internet boom. They have raised more than $22 million in venture capital so far.

Despite the stultifying business conditions in Brazil (it remains one of the worst bureaucratic, tax, and regulatory environments in the world), investors flocked to the country, fueling new incubators, hackathons, and venture capital funds. There is lot of new wealth in Brazil that wouldn’t exist today were it not for these startup companies, founded by both expats and Brazilians alike. In 2011, according to the Latin America Venture Capital Association, Brazil received approximately 80 percent of the $10.3 billion poured into the region.

What goes up, though, must come down. Brazil’s economy is slowing, inflation is rising, the currency is still overvalued, and retail sales figures for Q4 of 2012 were disappointing. As we know only too well from recent experience in the United States, when the economy slows, capital is much harder to find, and exits slack off. Incubators, accelerators and VC funds will consolidate, and entrepreneurs will have to find new and innovative ways to exploit the vast Brazilian consumer base.

That’s not to say that Brazil is necessarily a 2000-esque bubble, popping in slow motion. Rather, Brazil’s technology economy appears to be maturing into a more sustainable ecosystem that can nurture startups, just not at the torrid pace of the last 5 years. Just as the term “BRIC” is starting to look like a quaint anachronism, Brazil will no longer be the darling of the emerging markets capitalist set.

That distinction may very well pass to Mexico.

Mexico has much in common with Brazil at the beginning of its boom. Though approximately half Brazil’s size, Mexico still has over 112 million people, making it the second largest market in the region and the largest Spanish-speaking country in the world. Like Brazil, Mexico has a sizeable and growing middle class. And, like Brazil, Mexico has largely avoided the world’s financial crisis; since 2009 the ETF tracking the Mexican market, the MSCI Mexico Investable Market Index Fund (EWW), is up nearly 150 percent compared to the Dow Jones’ 57 percent gain over the same period.

And Mexico has a few things that Brazil doesn’t, starting with a much more welcoming environment for entrepreneurs. The World Bank’s annual “Doing Business” report for 2013 shows Mexico jumping 5 places, to number 48 in the world. Brazil, meanwhile, dropped two places, to number 130, putting it just behind Bangladesh (but still ahead of Nigeria). According to The Bank, it takes nine days to start a business in Mexico, compared to 119 days in Brazil.

Moreover, Mexico is less expensive than Brazil. Much less expensive. Americans in Brazil complain about the cost of rent, gasoline, taxis, food, and just about everything else. Mercer’s annual rating of cities’ cost of living recently had Sao Paulo and Rio at Nos. 12 and 13 in the world, respectively – the highest in the Americas. Mexico City, meanwhile, doesn’t even break the Top 100. And unlike Brazil, Mexico also has mostly free trade access to another huge market, the United States.

Mexico’s economy is not without its problems. One factor that has held back e-commerce in Mexico is its sclerotic banking sector. The process of paying for things in Mexico is often antiquated and inefficient. On the 1st and 15th of every month, Mexicans line up outside banks to deposit (or cash) their checks. To pay a phone bill, or rent, or electricity, average Mexicans may have to physically go to a bank and talk to a teller. Some transactions can be done at a local convenience store, but even that is far from a perfect solution. The only remaining option, if available, is to pay in cash, which inevitably results in a lot of unreported transactions.

And credit cards, which are ubiquitous in Brazil, are still in short supply in Mexico. According to the Banco de Mexico, in 2012 there were just over 25 million credit cards active in Mexico.  By contrast, in 2011 Brazil had over 200 million in circulation. If you look at those figures on a per capita basis, it suggests that most Brazilians have credit cards, while less than one quarter of Mexicans have them.  Mexicans still prefer debit-like cards such as Visa Electron, which isn’t always compatible with ecommerce gateways.

Mercifully, that is starting to change. Mexicans are starting to shed their skepticism of using technology for commerce. PayPal has begun to make inroads in Mexico, and credit card interest rates, which are usurious throughout Latin America, sometimes exceeding 40 percent APR, are slowly coming down, encouraging more Mexicans to use them. A study by Emarketer estimated that B2C e-commerce in Mexico will more than double between 2010-2015, from $3 billion to $7.6 billion.

Many believe the biggest deterrent to startup investment in Mexico is, to some extent, a PR problem. While the drug violence continues in the Northern states (though it has calmed somewhat in recent months), for many Mexicans it is a distant distraction from their daily lives. Mexico City, for example, had a 2012 murder rate of 8.0 per 100,000 population compared to Sao Paulo’s 15.6 (Chicago’s rate, for reference, was 19.4, and Los Angeles’ was 7.5). Even Monterrey, near the heart of Narcolandia and with a rate of 37.5 per 100,000, remains a key business center for the country. One of the largest VC funds in Mexico, Alta Ventures, (co-founded, incidentally, by an American expat) is based in Monterrey.

Barely a week after inauguration, Mexican president Enrique Peña Nieto hosted an “entrepreneur summit” at Los Pinos, Mexico’s White House. Many attendees were encouraged by his announcement of a National Entrepreneur Institute (though it should be said many entrepreneurs in Mexico remain deeply skeptical of this scheme).

In the end, though, what determines whether Mexico will inherit Brazil’s place as the “in” place for international entrepreneurs and investors will be the entrepreneurs and investors themselves, not the government. And while a trickle of investment, most publicly from Dave McClure’s 500 Startups, has begun to enter the startup ecosystem in Mexico, it’s still early days.

In the last few months, though, a new type of visitor has started arriving in Mexico City: Ivy League MBAs.