Experts discuss the opportunities and challenges facing entrepreneurs in Latin America.

LATINVEX SPECIAL
Knowledge@Wharton  

What are the most promising opportunities emerging for young entrepreneurs in the leading economies of Latin America? What challenges do entrepreneurs face in their efforts to take advantage of such opportunities? At the Wharton Latin America Conference 2013, a panel of four experienced entrepreneurs provided some answers to these critical questions.

The four entrepreneurs on the panel included:

• Edrizio De La Cruz, co-founder and CEO of Grupo Regalii, which enables Latino immigrants in the U.S. to send gift cards via text message to families in Latin America, for use in supermarkets and retail stores where they already shop;
• Rogelio De los Santos, managing partner of Alta Ventures Mexico, a venture capital firm based in that country;
• Juan Carlos Garcia, vice-president of e-commerce at Walmart de Mexico and Central America, a new division of Walmart, structured as a start-up; and
• Keith Schuman, the U.S.-born CEO and co-founder of Azahar Coffee Company, a vertically integrated producer of coffee based in Colombia

When Mexican entrepreneur Juan-Carlos Garcia attended the Wharton School in the late 1990s, most of his fellow students wound up going into banking and financial services, while only a few became entrepreneurs either in the U.S. or his native Latin America. And when Garcia founded his first start-up, there was no venture capital funding in Mexico.  “But now there is more structure,” Garcia said. “And the environment is more entrepreneur-friendly.”

The other members of the panel agreed that the entrepreneurial career path in Latin America also has more cache than in the past, in part because of the wide range of opportunities to leverage low-cost, but highly effective electronic technologies such as the mobile web. De Los Santos, who has been a serial entrepreneur over the past 20 years, agreed with Garcia that entrepreneurship is becoming much more popular in the region. “There is a rising tide,” as the perception grows that “becoming an entrepreneur is cool.”

Nevertheless, De la Cruz cautioned that, by its very nature, “entrepreneurship involves cultivating a product in the soil of extreme uncertainty.” You may not even know where your money is coming from, or how many employees you’ll have, he added. De la Cruz added that eager new entrepreneurs will have to spend the first few years of their entrepreneurial lives entirely committed to their work if they are to achieve financial freedom over the long term. “It is not like being an ordinary CEO,” he said “When you are an entrepreneur, the work never stops. You have to be absolutely addicted to what it is that you are doing. This game will chew you up and spit you out. It is challenging but at the same time, it is so rewarding.” 

Garcia agreed. “It takes a real toll on you, but it is highly rewarding, especially if you are doing something you are passionate about now,” he said. “Right now, Mexico and Latin America offer great opportunities, but choose something you are passionate about.”

U.S.-born Schuman, the only panel member who has established a Latin American start-up outside his native country, said that “being an entrepreneur in Colombia is a very arduous process. You are learning by failing. The risks of being an entrepreneur in Latin America are greater than in the United States.” However, he added, “There is tremendous opportunity…. It is really fascinating being in Colombia. There is so much change taking place; it is very exciting.” His company is one of five companies that have received government permits to mill, roast and export Colombian coffee.

Whatever the sector, the panel members agreed that entrepreneurs must be willing to dedicate themselves to the work at hand. “There are lots of new initiatives in start-ups,” said venture capitalist De Los Santos. Unfortunately, not all of the entrepreneurs involved in them either “have experience in working on real issues and not all of them are willing to sacrifice.” Added Garcia, “You don’t need to raise a lot of money to call yourself an entrepreneur, but you have to be fully invested in terms of your time”

THE MULTIPLE USES OF TECHNOLOGY

Although none of the entrepreneurs on the Wharton Latin America conference panel is involved in producing computer software or hardware, their entrepreneurial business models leverage the emergence of new technologies in the region, especially the mobile web. Edrizio de la Cruz, co-founder of Grupo Regalii, noted that as a child, he was exposed to the traditional cash-based behavior of his family and local community in the Dominican Republic.

In the Dominican Republic, 93% of the population now has mobile access, despite the fact that 35% of the population are still “unbanked” – that is to say, have no bank accounts of their own. “A lot of people there don’t trust banks.” In such an environment, De La Cruz’s company, Regalli, offers customers the opportunity to make purchases with a “mobile wallet” filled with an electronic form of currency, without opening a conventional bank account. By the end of 2013, users will also be able to pre-pay their pharmacy bills via mobile devices.

Mexican e-commerce specialist Garcia said that he is also “high on mobile” as a sales channel in Latin America.  He pointed out that until recently, many Mexicans had been unable to take advantage of electronic commerce because they lacked the fixed phone lines that would allow them to enjoy dial up connections to the Internet. Now “everyone has a smartphone,” and many people who could not shop online in the past can access the mobile web, leapfrogging e-commerce via the desktop personal computer or laptop PC. “At Walmart, we are growing at triple digits over the mobile web,” he said.

More broadly, Mexican venture capitalist De Los Santos said Latin American companies need to reinvent themselves by using “entirely new solutions that open space where there is no presence of that new technology.” Entrepreneurs can meet those needs a range of new ways. For example, he cited the water heater sector, a very traditional industry where solar technology is now making in-roads in Latin America, thanks to entrepreneurs. Newly designed solar-powered heaters are less expensive and have much shorter payback periods, he said, in a region where many people still lack access to hot water. This illustrates that entrepreneurs “don’t have to go to the high end applications or software services” to solve problems in unconventional ways.”

CAUTIONARY ADVICE

Manias come and go, especially in the high-tech world, spawning a boom or bust cycle of fundraising. During the late 1990s, when Garcia became an entrepreneur for the first time, “it was really easy to raise funds; it was crazy. There was a lot of money chasing very few ideas, and many of them were stupid.” A few years later, “people didn’t want to know anything at all about the dot coms” that had once been superstars. Nowadays, despite the fact that more and more young people are discovering the pleasure and pain of entrepreneurship, “individual investors are very selective” in their funding decisions because many investors have been burned in the past, said venture capitalist De los Santos.

On the other hand, “until you validate that your product works, don’t waste time trying to raise capital for it,” advised De la Cruz. If you can prove that your product works – and that it can satisfy the needs of potential customers, you’ll attract the money you need, he argued. “It’s sort of like dating; you don’t want to be chasing them,” he added. “You want them to be chasing you.”

For his part, De los Santos cautioned against the attractive delusion that things must be going well because everything looks fine on paper at the moment. “You have to be careful about not tricking yourself” just because, for example, you seem to have enough funding to succeed. “Don’t get tricked because ‘this is a very nice scenario’ and ‘there are very good people behind it.’ That can be an illusion.” However, he advised newcomers not to think too small when they define their goals and strategies. “Test yourself,” he said. “Think big. Get into the ring and start to swim and experiment.”

Garcia agreed that entrepreneurs have to be willing to pursue ideas that seem foolish to conventional thinkers. “People told me that this was never going to work in Latin America,” he says of an earlier e-commerce start-up in Mexico. “They said that customers wouldn’t buy online. I didn’t like the answer.” In truth, he discovered, “Most Mexican customers are not all that different from American customers. They all want better prices and better services.”

Although entrepreneurs need to think big, they must be methodical about how they manage their limited resources, panel members agreed. Garcia related that when he began an earlier start-up in microfinance sector, “I didn’t do due diligence on my partners, who were real estate developers, not financial guys.” On that score, De la Cruz cautioned: “You want to be extremely methodical about the people you choose as partners and investors, and the ecosystem you surround yourself with.” Added Schuman, “You will burn through cash faster than you expected.”

Looking back at their past experiences, the panel members also advised entrepreneurs not to be afraid of making the mistakes that come from thinking big. Schuman said, “If you haven’t made any mistakes, you are probably doing something wrong.” Reflecting on his own past errors, De los Santos said, “Big ideas smart small. I would have allowed myself to think bigger. With big problems come big rewards.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.