500 Startups Wants to Spur Flow of VC Cash to Mexico

Hot Silicon Valley venture capital firm 500 Startups‘ takeover of Mexican.VC last summer showed that U.S. venture capitalists are beginning to acknowledge the talent currently flourishing south of the border.

A discovery fund for Mexican start-ups, Mexican.VC was founded by Cesar Salazar and Santiago Zavala in late 2010 with the aim of mining the large and untapped potential of Mexican and Latin American startups.

“It was part of a strategy to go to places with a large market, in terms of language, so basically we identified Spanish speakers as a very interesting market,” Salazar explains.

He adds that Mexico is “a growing economy with a population very well connected to the Internet and an interesting and growing community of entrepreneurs, especially in Mexico City.”

A ‘Sensible’ Takeover

Mexican.VC quickly drew the attention of Silicon Valley-based 500 Startups, which became one of Mexican VC’s first investors in mid-2011. The organizations shared a similar culture and business plan, Salazar says. “We were basically mirror organizations but one was larger and global and the other one was smaller but with a very strong focus on the local scene.”

500 Startups had strong international ambitions and would “visit different places and try to connect with the local communities … [and] unite entrepreneurs, investors and government officials” through events such as Geeks on a Plane, Salazar says.

“It didn’t make any sense for Mexican.VC to do this as a separate entity because 500 Startups was already interested in going to different places,” he adds, noting that 500 Startups is also targeting India and Brazil and just opened offices in Malaysia, New York and now in Mexico City.

The merger of the two organizations is part of broader investor interest in Latin America. The trend is driven by both a growing global awareness of Latin America’s burgeoning entrepreneurial culture and companies’ desire to tap into Latin American markets as consumer purchasing power in the region increases.

500 Mexico City

The transition from Mexican.VC to 500 Startups “was actually really easy,” Salazar says. “There is a cultural fit between the two organizations. We do the same things. We believe in making a lot of small bets and then following up on the winner, and we believe in the community aspect of our operations.”

The changeover was recently completed with a merging of the two brands. “For some time we still used Mexican VC for local brands because it had enough recognition,” Salazar says, “but now we’re all working on the strength of the 500 brand and the operation we’ve got here in Mexico is going to be called 500 Mexico City.”

One of the key advantages of the merger is increased exposure for startups working with Mexican VC. Ten of them will pitch to investors at an event hosted by 500 Startups in Mountain View, Calif., on Feb. 5.

On the Lookout for Investors

Salazar says the biggest challenge for Mexican startups is finding investors, especially angel investors. “They’re really important for the development of a company, they help with connections, industry expertise.”

500 Mexico City plans to actively address the issue, “seeking out potential angel investors, including high-net individuals, former executives from large companies and even some successful entrepreneurs,” Salazar says.

Compared to their peers in Silicon Valley, Salazar says Mexican startups are less focused on raising money. In Silicon Valley, he says, “… there’s a very salient sophisticated culture of capital investment.” In contrast to U.S. entrepreneurs, those in Mexico “don’t necessarily care that much about the fund-raising aspect … it’s not in the culture yet.”

Yet he believes this is not necessarily a disadvantage. “I think it’s mostly a good thing because they really focus on what they’re trying to build and then we can shape them and help them understand how to build relationships with investors,” he says.

Because they have been less reliant on funding than their U.S. counterparts, Mexican startups are also highly focused on customers and revenue, he adds.

“What you find here are entrepreneurs who are very problem-orientated. They really want to solve a problem. They really want to build a product and scale that solution. They care about their customers, and they especially care about the revenue because there’s no history of venture-backed companies.”

Putting People First

Having settled into his role running 500 Mexico City, Salazar reveals it wants to invest in between 50 and 70 companies in the next 24 months, at least 50 in Mexico and as many as 20 in other Spanish-speaking countries. “We are going to accelerate at least half of them,” he says. Initial investment in each company is usually from $15,000 to $50,000 U.S. and can later rise to as much as $250,000 U.S.

Cesar Salazar

How does 500 Mexico City decide which startups are worthy of investment?

“We will focus at least 50 percent of our attention on the team,” he says. “We will try to find people that learn super fast, have a long-term vision and are able to break the short-term down into bite-sized tasks.”

“Another 30 percent is market opportunity – we are looking for companies who are targeting at least one-billion-dollar markets – and the other 20 percent is the product,” he adds. “But [the product] can change a lot. We would rather have a company that is really passionate about solving a problem than a team that has a product that looks great but doesn’t have the right people.”

Busting Out of the Boardroom

“We are definitely going to reinforce what we are doing here in Mexico City,” Salazar affirms. 500 Mexico City has a physical space that can accommodate around 60 entrepreneurs working full-time. It runs events every month – “mostly educational and networking events for startups,” according to Salazar.

“We’re really trying to change the way venture capital works in the world, we think that there’s a huge opportunity to make this a scalable business, one that scales to systems and networks, connecting people,” he says. “The time for long boardroom meetings is over … what the VC world needs now are people on the ground helping startups and connecting them with strong networks of mentors and investors so that they can help each other.”

Duncan Tucker is a British journalist based in Guadalajara, Mexico. He covers a wide mix of news, politics, business, the war on drugs, culture and sport. Aside from Global Delivery Report, he writes regularly for the Guadalajara Reporter, the Huffington Post and Soccer365.com. Much of his work can be found on Mexico-themed blog “The Tequila Files.” Follow Duncan on Twitter @DuncanTucker.