Mexico finally knows a boon for startups

KAVAK, A MEXICAN startup, provides an elegant solution to a glaring problem: how to buy a used vehicle in a market that is both one of the largest and most informal in the world. Few buyers trust a seller’s assessment of the quality of the property. Few sellers trust the buyer to shell out the money. Transactions often involve “meeting someone at a convenience store and seeing how it goes,” says Alejandro Guerra, general manager of Kavak in Mexico. On the Kavak app, people can buy and sell cars with the company acting as a trusted intermediary.

Kavak, which last month raised $ 700 million in a funding round valued at $ 8.7 billion, is part of a startup explosion in Mexico. Since the company became the first Mexican startup to be valued at over $ 1 billion last year, it has been joined by three other “unicorns.” So far this year, unlisted Mexican tech companies have raised nearly $ 3 billion, about as much as in the previous nine years combined (see chart).

Mexico’s 126 million people are on average young and fall almost in the upper middle income bracket. Some 54% own a smartphone, according to Newzoo, a research company, a slightly higher share than among Brazilians who are equally enamored of new things. Mexico is among the top five markets for tech stars like Uber in carpooling or Spotify in music streaming. That’s a huge deal for Rappi, a Colombian food delivery darling. Until recently, however, national founders struggled to make a name for themselves.

This is largely because of a lack of money. Mexican entrepreneurs had to go to local venture capital firms with relatively shallow pockets. That started to change in 2019, when SoftBank launched a LatinAmerica fund. In September, Japan’s free-spending tech investment group announced a second $ 3 billion fund, bringing its total investment in the region to $ 8 billion, much of it in Mexico. Others have piled up, including Sea, a Singaporean tech conglomerate, Founders Fund, a major Silicon Valley venture capitalist (CV) and Tiger Global, an aggressive New York hedge fund that recently rocked the CV world.

That money has poured into local businesses like Kavak solving what Philipp Haugwitz of McKinsey, a consultancy firm, calls “pain points” in Mexico, which are numerous, from horrific traffic to a heavy financial sector. With just one in three Mexicans having a bank account, hard-to-get loans, and too many cash-only businesses, fintech startups in particular are thriving, in part thanks to a 2018 fintech law. Fintech Radar, an industry newsletter, Mexico now has more fintechs than Brazil, the company’s historic hub in Latin America. Albo, an exclusively digital “neobank”, facilitates the creation of an account. Clip offers bank card readers for smartphones. GBM grants loans to small businesses with no credit history. Kavak helps finance transactions on its platform.

Obstacles remain. Like many startups, Mexican women face a hazy road to profitability. Dealing with bureaucracy is a nightmare; it can take days for Kavak to process a transaction in Mexico, compared to less than 40 minutes in Brazil. Still, investors are optimistic. Marcelo Claure, who heads the Latin American fund SoftBank, calls Mexico “the land of opportunity.” This has helped his fund’s returns surpass those of all other regions, he says. And what works in Mexico may work in other emerging markets. Kavak, which expanded to Argentina last year and Brazil this year, is now looking at those across the Pacific and Atlantic.

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This article appeared in the Business section of the print edition under the headline “The Mexican Wave”

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