February 9, 2021 5 min read
Opinions expressed by Entrepreneur contributors are their own.
By Victor Aguirre, co-founder of the firm specialized in startups, BlackBox .
Mexico is the most attractive market to start a startup in Latin America, this due to the large size of its internal market.
According to the Industry Data & Analysis Update on Latin American Private Equity & Venture Capital 2020 report from the Latin American Venture Capital Association (LAVCA), 2019 was the best year for Latin American entrepreneurship since 2011, as the Private Equity (PE ) and Venture Capital (VC) were for $ 6.5 billion, while strategic sales generated $ 2.6 billion through 39 acquisitions from both regional and international buyers.
For Mexico, the scenario was also encouraging, with investment capture in PE and VC for a total of 1.1 billion dollars committed in 115 agreements. In addition, the country is distinguished by having an ecosystem with a better territorial distribution of startups, with 32% in Mexico City and the Metropolitan Area, 10% in Guadalajara and 8% in Monterrey, according to the study Startup Latin America: Building a future Innovator , from the Organization for Economic Cooperation and Development (OECD).
Normally, startups that want to make their way in Latin America start by starting operations in Mexico. Founders of all nationalities choose our country to start, since the economy is attractive due to the size of its market and the ease of doing business.
Investment funds and private equity encourage Latin American startups to solve problems in their region, since these are very different from those in the United States or Europe. Mexico shares many traits with other Spanish-speaking countries and many customs, which is why it is ideal to launch a startup, as did Kavak, who has become the first Mexican unicorn (a startup with a value of more than 1,000 million dollars).
How to start the expansion?
The first step for a startup in Mexico to expand is:
Establish two companies. One in the United States, in the state of Delaware specifically, since the legislation of this entity is favorable for business operations and provides tax benefits. The constitution must be done under the C-corporation scheme, and the other will be a commercial company in Mexico, which is normally a public limited company with variable capital (SA de CV), although it can also be another type of commercial company .
Thus, the company in the United States is linked to the Mexican company, so that the former acts as the parent holding the shares and the Mexican is the subsidiary and operating entity.
The American is needed so that it can receive investments from international Venture Capital firms, since these, due to their investment policies, usually only invest in companies in the United States, among other reasons because of how easy it is to document investment rounds, how with the use of SAFEs ( simple agreement for future equity ).
This not only helps to access foreign investment rounds, it also opens the doors to startups that aspire to reach the international market, as it makes them more solid and better constituted companies.
Transfer funds to the company in Mexico. Once the company was incorporated in the United States and financing for the expansion was obtained, the funds raised must be transferred to Mexico to start operations.
But startups must be careful so that they are legally documented as capitalizations or capital transfers, and not remain as some other type of income since taxes will have to be paid.
What is the best country to start from Mexico?
Mexican startups that have already conquered their market can start operations in the Latin American country of their choice, it is regularly done in the partner’s country of origin, but Colombia, Peru and Argentina are also attractive markets.
Another option is Brazil, but usually this implies that these companies already have a contact there or that they hire local people. There are also cases of startups that are very aggressive and have a lot of capital and that immediately unfold in several countries at the same time.
Once in the new market, the startup’s operations are started according to the country’s legislation, but in order to reach this point, the most important thing is to have adequate advice at all times.
Find a specialist. To achieve this goal, a specialist lawyer is needed who knows well what type of legal structure can be made; that is, what are the options that the startup has, how to link the companies in the correct way and how it can achieve its goal in the best way and in the shortest possible time.