The biggest challenges for start-ups in Peru
Perú is a nice country: vast, with lots of different geographies, some of the deepest canyons in the world, adventure sports with not too much regulations, jungle, beach, mountains climbing around 6000 meters above see level, subtropical climate and extreme high-altitude climate (and gigantic lakes). There are around 30M people (and apparently more Twitter accounts than that, although that’s probably due to over-use of social marketing) and around 10M just in Lima, the capital. Nothing in comparison to Mexico DF, but still…
Recently, Peru has been considered as a very active hub of entrepreneurship, probably due, between others, to the existence of a very active team of entrepreneur-lovers called Lima Valley.
A little bit about me: I’m co-founder of Lima Valley (I was part of the team invited by Daniel Falcón to organize a few meeting and try to find a way to improve entrepreneurship in Peru back in 2008, but then stopped participating actively in mid-2009, so I couldn’t take much credit, really).
I have a start-up in Belgium and a start-up in Peru. I’ve been around in Perú since 2007 and I’m the leader of a famous free software (>open source) e-learning platform project called Chamilo. I have spent the last 10 years of my life “trying out” different business models around free software.
Although my financial success is nothing close to a miracle, I have been able to manage (obviously not alone) a project that now has 3.5M users around the world and generates (for our company alone) a reasonnable income per year (and almost no benefits given to the high amount we invest in research and development), with a steady growth year over year. That’s considering it’s a free platform, so not only our sales are more difficult to pitch, but we also make it easier for other companies to compete against us, because we think you can make a *honest* living out of services to improve education and that our product improves education and should be available for anybody who wants to put the extra effort of downloading and installing it. This is not our only source of revenue, but we are quite the experts in e-learning platforms in Latin America.
I’ve also been mentoring candidates for entrepreneurship at the Start-up Academy for several years, a project that was launched by Arturo Canez and Álvaro Zarate at the end of 2010, if I remember the date well. This has given me a wider and more profound view of what entrepreneurship is, what works, what doesn’t and which external elements can influence it.
One of the things I didn’t expect from today was Bowei asking, during the round table, for the public’s (about 80 people) thoughts about the biggest advantages and the biggest challenges in launching a start-up in Peru. I would have brought a long list of bullet points, but I’m the kind of very extensive speaker, not really ready for a one-minute speaking time style of his question to the public, so I decided to shut it up and write about it later on this blog.
One thing that kind of surprised me, though, is Bowei telling, as a conclusion address, that we didn’t need to wait for the government or any big organization to act in order to start our own business… I would have thought this was basic stuff for entrepreneurs! As if the only thing entrepreneurs were waiting for was a big funding enveloppe to start developing their ideas. Come on! I wouldn’t have assumed that (they didn’t know) in front of an entrepreneur crowd, but again, it’s better said than kept quiet.
The problem with funding in Peru is that it is practically impossible to get some as an IT start-up, unless you have very good friends in social sector A (B doesn’t even count). Money isn’t the source of the problem. Not having the right contacts is. You can be looking around and talking to people for years (in start-up time your project was born and dead twice) before you find people that combine the “believe in you” factor and the “I got that money to invest” factor. Having success as a start-up is not just about having a great idea *and* having the skills to build it (and that’s already difficult to find in one single person or great team). You also need massive amounts of good karma from a massive amount of people, and that’s where funding projects are useful (they already gather people ready for that).
Yes, you can definitely be successfull with a great idea and great skills, but this requires the 3rd element: good relationships. And that’s where most geeks fail, because it’s hard to be good technically and have a great social life at the same time, and that’s where you need the almost-impossible-match-without-money-being-involved: getting a social-life guy together with a geek in a relationship based on respect and mutual understanding. And this is where these funding projects get (very) useful.
Anyway, here is a list of challenges any start-up will meet in Peru. I’ll start with the ones quoted during the conference, either by panelists or by the public (with a little extra explanation from me):
- Mindset for entrepreneurship: people do not have the entrepreneurship model embedded in their mindset, so it’s difficult to have other people support you (if they don’t understand what you do). It’s even more difficult to find people to ally with you. People having a good idea tend to think their work is done and the rest must be handle by the tech guys.
- Funding by government: there is very little effort from the government to finance start-ups
- Trust: it is difficult to develop trust-based relationships in Peru
- Infrastructure: the current one, both in terms of roads and internet, make a huge number of initiatives impossible to implement. Even in Lima (only 30% of the national population), some areas do not have practical access to internet, nor proper roads network, for that matters
- Skills: it is very difficult to find people able to produce technological products
- Legal bluriness: a lot of legal processes linked to entrepreneurship are not defined or very complicated, which makes formalizing a real challenge. The chamber of commerce of Lima is currently hitting that nail very strongly for other businesses types as well, and I hope they will improve this situation for start-ups, as a side-effect. The government is also starting to involve the population in reducing the number of useless procedures (ver Trámite de más)
Here is my own list of challenges
- Mindset of investment: You can analyze it however you want, but the proportion of successfull worlwide start-up that have started inside the USA is ridiculously high in comparation to those having started outside the USA. This is true for Europe as well. It is incredibly more difficult (but US people probably don’t get how much) to promote an innovative solution if you don’t start in the US market. Why? There are at least 3 reasons, which I’ve tried to test over the last 5 years: (1) racism (or the fact that you are not ready to invest in some people from the third world unless this ensures very big money); (2) propensity or easiness to buy, digitally (US people are much more ready to use digital payment systems than the rest of the world, which makes all kinds of micro-payment services work much better from the start, as you remove a huge problem for adoption); (3) language (it is true that Latin America has a larger audience than the USA, but face it, people in China have a much higher chance of knowing English than knowing Spanish, even more so for early-adopters profiles, making for a much larger user base from the very start – when the start-up needs it the most); (4) history (people around the world are much more likely to put their trust in a start-up from the USA because they’ve already heard so much about others reaching success).
- Trust: It’s already been mentioned before, but trust is an incredible ally if you have it. A huge problem is Peru it that it is plagued by untrustable people who take each and every possibility to put you in a corner and kill you. Obviously, this is not a majority (far from that) but the existence of these people is enough to plague the whole society like cancer and make anyone doubt any alliance, even with their best friends. The lack of public voice against them encourages this behaviour. The “vivo” stereotype is pretty much accepted in society an there is almost nothing done about it. I believe this certainly achieves killing about 30-40% of any entrepreneurship project in Peru.
- Keywords: this goes a little around the mindset point mentioned before. For some reason, people all around do not tie the term “start-up” with innovation yet. They seem to believe that a start-up is a little shop you open at the corner and that it is only meant to serve local people. Once you mention you are doing “innovation” (keyword), then they open their eyes and start listening to you (sometimes)
- Copy-pasting-updating and the lack of legal boundaries: although innovation is present in Peru, and many people call it inventivity, a lot of cases are still copy-pasting what someone else did and quickly building up something similar. This has the very damaging effect of considering any innovation (at least in the computer-based-solutions) as a “cheap” process, which then makes it impossible to properly invest in doing innovation the right way and really “invent” stuff. This is further encouraged by the lack of enforcement of Peruvian laws: infringing a software patent is not even considered when building most web applications. If you find it on the web, then it’s free (as in freedom) to use. This encourages copy and reduces the benefits of innovation. I’m not saying software patents are a good thing (I, for one, am completely against them), but there needs to exist a mechanism by which the innovators are glorified (free software licenses encourage building up reputation and respect of the innovators), and an enforcement of such mechanism. If everybody uses Windows for free and does not question its security, philosophy or usability, then there is no incentive for anyone else to build a better product.
- Payment systems: it is still very difficult to reach a large number of people as non-human-assisted payment methods are not accessible to all. There are efforts being made in this direction, but it seems like there is no real political intention to massively distribute it still (the plan has been around for 3 years already)
- Internal racism: a cultural problem almost invisible to whom doesn’t analyse Peru’s society is internal racism, in particular towards people living in or coming from the Andes (“Serranos” as they are called). It is pretty difficult to get all these people together woking on the same team as they tend not to be able to trust each other. I won’t go into the details, but this is both a potential problem inside the start-up and outside it, as you try to develop the business based on people close to you
- Government understanding: even though funding is not a requirement for start-ups, the problem is that the government representatives in power do not even begin to understand what innovation really is. Of course, there are a few exceptions (maybe 10 people in a relevant position) but that’s not nearly enough to support a culture of innovation. It goes even further than that: some gov staff actually believe that the government money is their money and that they should save it to avoid spending it on the wrong items.
- Government funding: there are, at the moment, programs for funding of innovation, but if you compare the list of proposed projects an the list of projects which have been assigned funding, you find yourself in front of a huge amount of agronomical projects and maybe 1% of technological-services-based projects. It’s just that the judges for these grants do not even understand these projects, I’m sure, so they fall back to stuff they know. If you read about the numbers, you then realize that, any given year, the budget spent on innovation projects is about only 40% of the total budget they had on their hands. The rest goes to the national reserve (I hope).
- Government politics about start-ups: so in reaction to what neighbouring countries do (Chile is a recent example), the Peruvian government decides to also promote a fund for start-ups, and they launch a program to do that… OK, so the program has been advertised in November 2012 by the minister of production, and you listen now (March 2013) that the “plan” is still not finished, and that they “hope” it will be ready in 9 months. Come on! Get serious. If the ministry of production understood start-ups, they would also understand that dozens of good projects will die in the meantime, and that the only right way to proceed is by trial and error (agile), improving the plan every year, but starting now. Ideally, they would also include real entrepreneurs in the team building this project, and not just government staff (which is rather the opposite mindset, by definition). The problem with these programs being politicalized is that, if badly managed, they confuse entrepreneurs and make them loose their time doing proposals oriented at the interests of the project for the government, finally to be discarded because the judges don’t even understand it. Even when you send a project that makes sense 3 months before the project deadline, it gets rejected on the basis of one block not being clear enough, but it gets rejected when there is no possibility for you to fix this. If the government is going to be left with more than 60% of the budget on their hands anyway, what’s the real point of asking for people in areas they don’t understand to participate?
- Corruption: although it is always difficult to prove, corruption is present everywhere. Corruption doesn’t work (at all) with the start-up business models, based on transparency and rewarding efficiency. I put it last, however, because these last year corruption seems not to have touched that many start-ups.
Some of the advantages of Peru mentioned by panelists or the public:
- Inventivity of the people (I really don’t agree with that being an advantage of Peru, as it could be said of any developing country: by essence, they have to do more with less, but that has nothing to do with being more inventive, in my opinion, it’s just a matter of opportunity)
- Biodiversity (true, but that’s also doingthe case for Brazil, Madagascar, Thailand, and a long list of others with anything like “jungle” in their geography)
- Cultural diversity (true, but that can also be a disadvantage)
- Food (true, but it still lacks a large-scale improvement in distribution, conservation and hygiene before it can be massified and treated as an advantage to the outside world)
My opinion on Peru’s advantages for start-ups (work in progress):
- Virgin market: many things can be “tried out” here without much impact in case of failure. Don’t abuse it: most farmaceutical companies still sell drugs here that have been prohibited from sale in the USA or Europe. That’s not the kind of “trying out” that I feel comfortable doing…
- Low fares: the cost of production for many things is very low (more so out of Lima), so if you are “starting up” with something that involves local goods, production costs will be low. However, don’t rely too much on exportations, as the corresponding processes are really out of proportion and mostly accessible only to large businesses. Watch out for the cost of highly-skilled staff, though, as these can be in complete disproportion to the rest of the workforce and the cost of living (demand is very high, offer very low)
- Delivery costs: Mobility is very low cost (if it doesn’t involve air transport) inside Peru, so hiring a team to deliver products on a motorbike in Lima, for example, can be extremely inexpensive (in comparison to Europe, where delivery was considered, 10 years ago, not to be possible under 30€/hour)
- One language to in the commerce bind them: Latin America, to a few exception (the most notable being Brazil) is a huge continent where everyone speaks Spanish. That’s a huge advantage in terms of commerce over Europe, although not so much over USA+Canada or China. It also has tons of local languages (there are more than 35 languages still alive in Peru alone).
In conclusion, as for any market, if you want to have success as a start-up, you have to know the market and find the best advantage points for your case. Peru is certainly not a paradise for start-ups, and current entrepreneurs here can certainly be hailed for there ability to go against the current. Levelling up the skills of staff in general would really improve the situation exponentially, though. No… really!