I have been asked many times about the situation of venture capital in Mexico. The quick answer is that the industry is developing fast having almost doubled in the last three years. As an anecdote, almost 200 people attended the annual Mexico VC Day in San Francisco two weeks ago. Only around 50 attended three years ago.
AMEXCAP together with EY have published their 2015 report on the industry (you can read the full and lengthy report in Spanish here). AMEXCAP is the well-developed Mexican Private Equity and Venture Capital Association, with 59 funds managers as members today. Most large and mid-size funds active in the country are members. For reference, the association had less than 30 funds when I was its Chairman in 2009.
The report identified 42 venture capital funds with $1.2B dollars under management (many of the smaller funds do not participate in AMEXCAP yet due to their size). The total private equity industry manages $29B, so venture capital funds represent only 4.1% of that amount. However, it has been growing faster than other fund types, from 3.1% in 2010.
The number of fund managers has more than doubled in the last three years thanks to INADEM – the Instituto Nacional del Emprendedor – the agency of the Mexican government focused on promoting high impact entrepreneurship. INADEM started a program to support the creation of new fund managers at the seed stage by providing co-investment capital with a capped return. That means that if the fund generates returns over certain threshold (in most cases around 8% annualized), INADEM only gets up to that threshold and the other investors in the fund share the excess return. A very good incentive to attract investors! INADEM contributes a one to one matching funding to private investors’ money up to $50 million pesos.
INADEM approved more than 30 funds in the last 3 years as part of this program. Not all the funds approved might be able to raise money from private investors and then they will not get the matching funding from the agency. But assuming 30 fund managers do raise funds at the maximum level, more than $150 million dollars of new seed funding will be available in Mexico. One of the key rules of the INADEM is that this money has to be invested in companies with significant operations in Mexico. The impact could be 300 startups invested, at an average investment of $500k dollars. This is a huge push for the Mexican startup ecosystem and great news for startups operating in Mexico.
What Mexico is still lacking is more funds in the later stages of the venture cycle, doing what is traditionally called Series A, Series B and later. Few funds (ours is one of those) have more than $50 million dollars to be able to invest at that stage. However, fund raising of several new funds is in the horizon, so I am sure capital will be available to continue funding the successful companies generated by the seed money in a few years. Of course, international funds will also participate at these rounds, but having local money as co-investors is important for them.
The other weakness of the sector is that most funds are what is called “first time funds”, so the fund managers do not have a proven track record of investing successfully and generating positive returns for their investors. This will change over time. Private equity in Mexico had the same issue 15 years ago, and now a number of successful fund managers have raised successive funds proving that managers can have positive track records in the country. I believe the same will happen in early stage investing.
We are at the beginning of an industry in Mexico with great opportunities. Many of us are working hard to realize that potential and we are confident we will.