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Costa Rica Startup Ecosystem Mapping 2016


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The study was based on qualitative interviews to different members of the startup community, including entrepreneurs, mentors, investors, incubators, event organizers and government officials.
The resulting report provided a comprehensive view of the state of entrepreneurship in Costa Rica including determinants such as culture, the startup community, the entrepreneur, the startup and funding.

Published in: Business
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Costa Rica Startup Ecosystem Mapping 2016

  1. 1. 1 Costa Rica Startup Ecosystem Mapping: actors, connections and best practices
  2. 2. When asked to map the startup ecosystem in Costa Rica, the first question that came to mind was, “Why?” There were existing studies both for the country and for Latin America, with detailed metrics across multiple variables, and indexes comparing Costa Rica to the rest of the world. Was there a need for anything else? Sincethen,manyorganizationshavebeentalking aboutarticulatingtheecosystem’sexisting initiatives.Itseemedreasonablethat,ifthegoal wastoconnectactors,itwasimportanttoknow whotheywere,whattheyweredoing,andwhat conditionswereeitherhelpingorpreventing themfromworkingtogether. Thus, we developed a different type of mapping, one that was qualitative instead of quantitative in nature; one without the goal of measuring the variables of the startup community, but rather to listen and learn from its actors; one with a final outcome that was not a ranking but actionable insights. This mapping accounts for the human dimension of starting a business, and the cultural traits that influence relationship building, collaboration and risk taking. It encompasses elements that people might discuss over a beer, but that rarely find their way into scientific reports. On one hand, this study serves as an actual map—it can help us navigate the startup ecosystem. It shows us who the organizations are, what they are doing, and how they are attempting to contribute to the startup community. This is then, about helping entrepreneurs connect and find the resources they need with less trial and error. But on the other hand this mapping is also actionable. Starting your own company, running an incubator, or investing in a promising startup isn’t just about connecting; it’s also about doing. If there are others who have successfully faced and, in some cases, resolved these challenges, wouldn’t it be great if we could learn from them? Because of that, this map is also about sharing what has worked for some of the more experienced members of the community, as well as what hasn’t, and what they’ve learned in the process. If we wish to articulate our efforts, what better place to start than sharing experiences? Webetonvisibilityasthewaytofosterthe articulationeveryoneistalkingabout.Getting toknowoneanother,sharingourindividual challenges,sparkingconversationsinthehuman andculturaldimension—inshort,comingupwith alternativesolutionscollectivelyandhelping thosewhoarejustjoiningin.Hopefully,thisisjust thebeginning.Thiscannotbeanindividualeffort, butonesharedbytheentirecommunity.Ihope youwilljoinus. Prologue Randall Trejos Project Director 2 3
  3. 3. 4 5 Diego May Junar Vinicio Chanto Slidebean Fernando Arce Yo Emprendedor Mariana Vargas Arias & Muñoz Gerardo Villalobos UNA Emprendedores Alejandro Egea Nacascolo Holdings Marcelo Lebendiker Parquetec Paula Guevara Consultoría creativa Carolina Flores AUGE Sourav Sharma Startup Grind Tomás de Camino Fundacion Costa Rica para la Innovacion Carlos Mora de la Orden Sergio Ballester Indigo Drones Jose Miguel Zamora Project Intern Adrián García Carao Ventures Priscilla Moreira Embajada de Holanda Carolina Taborda Fundacion Costa Rica para la Innovacion David Bullón MICITT Eric de la Goublaye delaGuayaba Gustavo Madrigal Morpho Animation Studio Luis Alonso Jiménez AUGE David Payne Mentor / Inversionista Alejandro Vega Huli Angélique Ladureau McKinsey & Company Claudio Pinto Fairplay Labs Rosalía Morales NIC Costa Rica Mónica Hidalgo Impactico Carlos Gallegos Ernst & Young Maritza Vargas UNA Emprendedores Alejandro Brenes Enertiva Juan José Muñoz Open Future / POOM Gabriela Arguedas Project Intern Juan Carlos Martí CIE TEC Armando González Lead University Randolf Kissling Mentor / Inversionista Federico Zoufaly Mentor / Inversionista Andrei Fuentes Parso Paula Díaz P. Graphic Design Paul Fervoy Miweb Josué Fumero Ernst & Young Vanessa Lean Cuestamoras Allan Boruchowicz Carao Ventures This study is the result of hours of interviews with entrepreneurs, mentors, incubator directors, investors, government officials and other actors of the startup ecosystem. Whether through formal interviews or more casual meetings, their willingness to share their experiences, perspectives and ideas is what made this study possible. We thank them, and acknowledge their most valuable contribution. On behalf of the Startup Costa Rica team, we are very pleased to share the results of the research and analysis documented in this report. We are also honored with the support and trust received from the British Embassy in Costa Rica by giving us the opportunity to generate what we believe is a fresh, intimate view of the startup ecosystem, and represents a series of valuable insights and tools for the most important actor in the startup ecosystem: the entrepreneur. For a small, young organization like ours, the publication of this report is a major milestone, but even more important is the experience we’ve had throughout the past several months conversing with major organizations and individuals working on entrepreneurship in the country. There is much to do and many challenges within the startup ecosystem in Costa Rica, but the openness, genuine interest and commitment from everyone we worked with gives us hope that we are heading in the right direction. Finallywe would like to thank those who first believed in our organization and joined us on this journey: Paula Guevara, Rafael Cañas and Edgar Mora. Also, special thanks to Randall Trejos, who lead this project since the start and remained committed far beyond its initial scope, making the final product an even more comprehensive and valuable asset for the Costa Rican startup community. Acknowledgements Ignacio Castro Director Startup Costa Rica
  4. 4. 7 Contents 6 - PROLOGUE 3 - ACKNOWLEDGEMENTS 4 - CONTENTS 7 - INTRODUCTION 8 - The purpose of the study - About this Report - About the Author - Startup Costa Rica and its Director - UK Science and Innovation Fund - EXECUTIVE SUMMARY 13 - ACTORS OF THE ECOSYSTEM: WHO’S WHO 14 - FINDINGS 1. COSTA RICAN CULTURE 16 - Low trust leads to low collaboration. - Low visibility leads to low collective learning. - The path of stability through employment. - Position towards mistakes: No one wants to be “that guy” (or girl). - A well-educated and trained talent pool. - Lack of saving and investment culture. - Strong cultural bias toward socially-minded businesses. - Opportunities to develop startup-friendly regulation. 2. THE STARTUP COMMUNITY 26 - The SME – Startup distinction. - The “who” before the “what”. - Individual initiatives don’t always fit well together. - Organizations and their sustainability. - The critical mass problem. - Entrepreneurship events and the effects of cross- pollination. - Startup Competitions and their role in providing visibility and access to resources. - Resource base: Service providers can’t always adequately serve startups. - Connectors: Minding the gap between entrepreneurs and investors. - The elusive success story: A precedent the community is waiting for. - Reinventing the wheel: A lack of connection with more developed ecosystems. - An umbrella organization. 3. THE ENTREPRENEUR 44 - The emotional price of becoming an entrepreneur. - Ideal stage of life to start a company. - When to leave your day job: The dilemma of the part-time entrepreneurship. - On sharing risk and equity: The loner problem. - Lack of understanding about private investment. 4. THE STARTUP 50 - Step one: Building the team. - The quest for a business model: How to turn an idea into a company. - The need for speed: Organic growth is not for everyone. - Early stage funding: Surviving the valley of death. - Thinking local, postponing global. 5. FUNDING 58 - The available sources of funding. - The Gap: Seed or early stage funding. - Friends and family as viable source (depending on the family). - Government money. - A banking sector that is unable to serve startups - The “average” startup as a private investment opportunity. - Scattered angels. - The critical mass problem and its implication for investors. - Investment clubs and acceleration. - New generations of family businesses may create an alternative. - CONCLUSIONS AND THE PATH AHEAD 72 - A systemic issue. - Culture underlies everything; but culture is built from personal choices. - Visibility and knowledge sharing will speed things up for everyone. - Entrepreneurs must lead the way. A bet on a bottom-up approach. A long-term vision of the ecosystem: the organization’s challenge. - FINAL THOUGHTS 76 - BEST PRACTICES 78
  5. 5. 8 9 entrepreneurship in Costa Rica. This is reflected not only in the informal writing style, but also the content. While many of the insights discussed may not seem new to seasoned actors within the ecosystem, they will likely be new to entrepreneurs, investors, mentors and other stakeholders not closely in contact with the startup community. Our intent is to share what we’ve learned of the ecosystem’s experiences with as many people as possible, in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community. Finally, through conversations and the shared interest of building bridges to assist collaboration, some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship, share best practices and articulate what have so far been isolated efforts. We can only hope that this initiative will continue to gain traction, until it becomes a movement. We will do our part to see that it does. About this Report The findings in this report are organized into five sections, each addressing a different determinant of the startup ecosystem, ranging from macro conditions to individual cases: 1. Costa Rican Culture. This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development. 2. The Startup Community. Here, we discuss the dynamics among different actors of the startup community. We also refer to the online mapping at were we provide a comprehensive list of all participants, their role in the community, their value proposition, who are they targeting, and how to contact them. 3. The Entrepreneur. The main actors in the ecosystem, in this section we analyze the individual factors that impact an entrepreneur’s decision to start a company, and the day-to-day challenges this implies— from risk profile and stage of life, to the role of personal networks and business acumen in the success of the startup. 4. The Startup. Once founded, each company has its own challenges. In this section, we discuss the main obstacles young startups face in the local ecosystem. 5. Funding. Finally, because of the notable focus that most actors in the ecosystem give to the subject of funding, in this section we layout the main sources of funding, their implications and the impact that many initiatives have had on the startup community. During our discussion of the findings and challenges in each section, we share best practices provided by these same actors during the interviews. These should not be taken as definitive answers to a given problem, nor as “recipes for success” but, rather, as a collection of lessons learned, examples of practices that have worked in other ecosystems, and diverse takes on how to overcome current challenges. We have also made an effort to provide as much context as possible, in the form of external links and references, so that interested readers can explore a topic in Introduction In the last five years, entrepreneurship has gained significant attention in Costa Rica. With the creation of numerous incubators, government sponsored competitions and increased media coverage, starting a company now seems a rather viable option for many. However, as the majority of these initiatives emerge individually, attention has recently shifted to how they can begin to connect and work together. When we view entrepreneurship as the result of interactions between many different actors, rather than an isolated act of a single entrepreneur, we move the conversation to one about ecosystems, relationships and connections. When seeking examples of cities where startups thrive, it is often not one single element that contributes to a company’s creation; it’s a combination of conditions, actors and the synergies created by the links between them. The purpose of the study The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities. More importantly, to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community. At its core, this study is an attempt to gather, systematize and openly share the knowledge and experience of the community’s main participants. Through interviews with more than 30 entrepreneurs, investors, incubators and program directors as well as government officials, we have gone beyond just mapping— to generating insights and sharing best practices. Many of the ideas expressed in this report come directly from the actors interviewed, and may reflect personal opinions that are, of course, subject to debate. Whenever authorized by the interviewee, we have included quotes as a direct reference to their position. We have also made the best possible effort to verify, though all available means, any facts and figures mentioned during the interviews. Unlike previous reports, this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries. For such quantitative and comparative studies, you can refer to PRODEM’s 2015 Report for Latin America and GEM’s 2014 Report for Costa Rica. For the present study, we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors. We also wanted to make this report accessible for anyone interested in
  6. 6. 10 11 greater detail, check official websites from which the information was taken, or contact organizations directly. About the Author Randall Trejos is an advisor in startup and small business development, and director of the Founder Institute in Costa Rica. He specializes in sales, marketing and communication, with a strong focus on behavioral sciences. He writes about entrepreneurship, social ventures and angel investment for organizations like Tico Times, INCAE Business School and VIVA. Trejos studied Psychology at Universidad de Costa Rica, Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School. Startup Costa Rica and its Director The Startup Costa Rica Foundation is a nonprofit organization that supports projects, programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica. It also seeks to collaborate, share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision. By collaborating in the launch of the Founder Institute in Costa Rica, Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs who are just starting their journey, providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country. Ignacio Castro, Startup Costa Rica’s founder and director, is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients. He has worked for such global organizations as Chiquita Brands, Intel, Houghton Mifflin Harcourt and NTT Data. Since 2011, he has been involved in strategy and custom application development projects for companies such as S&P, Citibank and Santander Bank. In 2011, he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country. He received an MBA from MIT Sloan School of Management, and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica. UK Science and Innovation Fund Finally, this study would not have been possible without the support of the British Embassy, through the UK Science and Innovation Fund. By helping to promote economic development through innovation capacity building in Costa Rica, the initiative is filling an important research need that— though widely recognized—often lacks the funding to come to fruition.
  7. 7. 12 There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship. Many of these are “hard” factors like the availability of financing, supporting public policy and technology infrastructure and adoption. Others are “soft” variables such as cultural idiosyncrasies and social capital, which are more difficult to measure but easily noticeable and widely reported by members of the community. The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem. The actors considered to be part of the startup ecosystem, regardless of their role, include entrepreneurs, mentors, investors, incubators and programs, entrepreneurship-related events, coworking spaces, governments, universities and firms catering to startups such as legal, accounting, digital marketing, etc. When it comes to macro variables such as public policy, availability of financing and technology infrastructure, the study found both challenges and opportunities. Government involvement in the startup community has been increasing in the past years, but with slow visible progress. Bureaucracy, the lack of distinction between traditional small businesses and startups, and the subjection of these to the same regulations as corporations, are among entrepreneurs’ common complaints. Government-sponsored programs like Capital Semilla have helped close the gap of early stage/seed investments, however after two iterations the program was discontinued. As for private investment, there are still challenges to investors and entrepreneurs successfully connecting, due to the tendency Executive Summary 13 to do business within close circles, the lack of knowledge on both sides regarding venture capital and startup valuation, and the large supply of investment vehicles traditionally perceived as safer. Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors, helping to bridge the current gap. Technologicalinfrastructureandadoption,along withahighlyqualifiedtalentpool,areamong CostaRica’sstartupecosystem’sstrongpoints identifiedinthestudy.Astrongeducationsystem, particularlyintechnicalandscientificfieldsis viewedasthegoldenopportunityforinnovation- basedstartupsinfieldslikesoftwareandbiotech. Thetalentpool,however,ishighlyinfluencedby thewidespreadpresenceofmultinationalsin thecountry,bothintermsofsettingjobmarket conditions,aswellasprofessionaltraining anddevelopment.Thecountry’sculturaland geographicalproximitytotheUnitedStatesand thewidespreaduseoftheEnglishlanguagehave alsobeenidentifiedaspotentialadvantages, particularlyintermsofconnectingtomore matureecosystemsinU.S.cities. When addressing cultural determinants, the study pointed to the significant effect that Costa Ricans’ attitude towards trust has on startup success. From the entrepreneur’s ability to find co-founders and team members outside their circles of friends, to the difficulty of connecting to investors and mentors, a perceived low trust seems to be the constant in relationship building. Ties with people outside the circle of family and friends were shown to be weak, leading to unbalanced teams in terms of expertise, or stark individuality. Members of the community working in relative disconnection from one another has caused a low visibility of successful cases, little sharing of best practices and repeated efforts to resolve the same challenges. Finally, although the above factors are often cited and considered individually, the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors. The cultural tendencies regarding relationship building, collaboration and short-term thinking have caused what is known as “low network density,” or few connections between actors. There are favorable conditions in terms of entrepreneurial talent, support organizations, government participation and an evolving investment landscape that could boost the ecosystem, but just as long as those connections are strengthened. The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative, coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability. Costa Rican Culture
  8. 8. 14 15 Actors of the Ecosystem: Who’s who. A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that in one way or another play a role in it. By visiting you will find the profile of all organizations that support entrepreneurs including: 1. What the organization does and their role in the community 2. The profile of entrepreneur and type of projects or industries they focus on 3.Thespecificprogramstheyofferandwhatentrepreneursmustdototakeadvantageofthem. 4. Their main contact information so you can easily reach them. entrepreneurs mentors coworking spacesgoverments universities and research centers supporting firms / resources incubators accelerators Events and competitions investors To make it easier to find the right organizations, we have arranged them according to the stage of the startup development their services are directed to, however in many cases organizations will be found in more than one stage. Also notice that the stages outlined below are merely to provide a guide; each start-up’s reality is unique and some entrepreneurs might find it difficult to draw the line between one stage and the next.
  9. 9. 16 17 Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews. Cultural traits concerning collaboration, how mistakes are perceived, how much people trust one another, and saving and investing habits, to mention a few, underlie many of the issues identified as challenges in the local startup ecosystem. Low trust leads to low collaboration • High and low trust societies • Idea stealing • “I can do it myself” mentality • Low trust among organizations According to many interviewees, Costa Ricans tend to be mistrustful of others, which impacts their ability to collaborate. The subject of trust in societies has been amply studied, 1 and shows that social capital—the ability of its members to trust one another enough to form organizations beyond family circles—is a key determinant in a society’s ability to form large companies and, at a macro level, prosperity. Latin American countries, traditionally described as low trust societies, show a tendency for weak ties outside the family, strong individualism, stark hierarchies and family- run businesses—all characteristics observed by our interviewees. The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen. This skepticism and assumptions about other’s trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project. During community events, few entrepreneurs will openly share details about their ideas, which limits their opportunity to connect with others. Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time. These entrepreneurs, however, usually present themselves more as role models than as potential partners for collaboration. This lack of trust and collaboration leads to a “I can do it myself” mentality, which in turn creates an insurmountable challenge for entrepreneurs, placing them in a position where they must handle all areas of the business—some of which they may be ill prepared for. As an alternative, when starting a business, many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust. This culturally- rooted practice has implications for the creation of project teams, as many are based on familiarity, rather than the talent the project requires (see The Startup). The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community). Mostorganizations—fromincubatorstoprograms;from eventstocompetitions—seemtobetryingtoaddressthe community’sneedsontheirown,oftenrepeatingefforts alreadypresentintheecosysteminsteadofjoiningforces tocreategreatervalueforthecommunity. FINDINGS Costa Rican culture. a. 1 For more on the subject of trust in societies, refer to Trust: The social virtues and the creation of prosperity by Francis Fukuyama. Culture
  10. 10. 18 19 “The Costa Rican is very humble and doesn’t like to brag. This is why we don’t hear about many success cases”. - Diego May, Junar Low visibility leads to low collective learning • Keeping a low profile • Invisible precedents • Collective learning Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to “put themselves out there” and become too visible. While some argue that this is rooted in the characteristic humbleness of the Tico, others point to the tendency to avoid criticism and confrontation. What is certain, is that cases of success or failure are widely unknown, and widely unreported. Low visibility has two implications: On one hand, success stories—the source of inspiration for young entrepreneurs and validation to incipient investors—remain unknown to the public and, therefore, do not fulfill their role of creating precedents for the startup community. Second, if failures and their subsequent lessons are not shared with the rest of the ecosystem, the opportunity to collectively learn and evolve is drastically reduced. While in the case of failures, there is an emotional component to how it is culturally assumed (see Costa Rican Culture), even in close circles, conversations about failing and what was learned are largely absent. Finally, many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms. Resorting to a low profile may indeed protect entrepreneurs from harsh critics, but at a very high price; that of lost opportunities to connect with fellow entrepreneurs, potential backers, and service providers. Culture
  11. 11. 20 21 Culture Position towards mistakes: No one wants to be “that guy” (or girl) • The elephant in the room • The taboo of screwing up • Learning from the mistakes (of others) To acknowledge one’s mistakes—and, further, to learn from them—is one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people. It is, however, easier said than done. Although there is no definite indicator, it is generally perceived that mistakes and lessons learned are rarely the subject of talks, meetups or blog posts in the Costa Rican startup community. There are likely multiple reasons for this, from wanting to remain positive and focus on what’s working rather than what’s not, to wanting to save face with the community. The fact is, there are very few conversations regarding mishaps. Of course, generally speaking, no one wants to make a mistake, let alone admit to having made one; but how the surrounding culture perceives errors drives entrepreneurs’ behavior in a big way. In the local startup community, the fact that it is a subject that most would rather avoid gives it a sense of taboo. This behavior also seems to reproduce itself in organizations that support entrepreneurs. Metrics regarding successes and failures are not made public, nor openly discussed. Internally, each organization analyzes its results and makes necessary changes. This discussion, however, rarely involves other stakeholders. One could argue that the lessons of each organization is “its own business,” and that sharing this information could lead to a competitive disadvantage. While this is a valid rationale, the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community. Best practices are not shared, and remain in the hands of a very small number of constituents, who can only impact the individual segment of the community they serve. The implications for entrepreneurs, as in the case of low visibility discussed above, are twofold. On one hand, if the subject of mistakes is to be avoided or not openly shared, this means that each startup risks shying away “One of the main challenges entrepreneurs face here is that, socially, the environment doesn’t seem to support entrepreneurship. When people take the leap, they don’t always get full support from their families or partners. In our case, it has even interfered with our recruiting efforts. Parents of candidates have deterred them from joining a small, unknown company.” - Alejandro Vega, Huli The path of stability through employment • Stable, public-sector jobs • Entrepreneurship as a career path • Evangelizing entrepreneurship early on When asked about the reasons that more startups aren’t created each year, a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations. Though there is no definitive statistic, it is estimated that at the end of 2013, the Costa Rican public sector was employing nearly 300,000 people. Public sector wages are an averageof150% higher than the private sector, and it is widely recognized that public sector workers receive outstanding benefits—factors that help us understand its attractiveness. Once in the workforce, the price of walking away from a secure, well-paying job in favor of an uncertain venture isn’t just economic, it’s psychological. Costa Ricans who are considering a startup may feel that family and friends—even society as a whole—don’t yet see entrepreneurship as a desirable career path. Though this could be perceived as having a subtle, almost negligible effect, but for some entrepreneurs it has a very real impact. To counter these effects, companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are, and the benefits of working for one. ThetopicofentrepreneurshipinCostaRicahasonly recentlybeguntoreachthegeneralpublic.Withthe creationofincubators,supportprogramsandevents, mediacoveragehasincreased.Studentsandyoung professionalsarenowbeginningtoseeastartupasa viablecareerpath.Thetopicisstillabsentfrommany universityprograms,however,andentrepreneurship coursesandseminarshaveonlybeguntopopupin thelastfourorfiveyears. When we compare our region to more developed entrepreneurial ecosystems, there seems to be a cultural theme where people bet on an big employer state or a multinational corporation, instead of starting your own company or working for a startup”. - Allan Boruchowicz, Carao Ventures “In Costa Rica and most countries in Latin America, it seems that making mistakes has a negative connotation, while in other places it is celebrated; this changes the willingness people have to take risks and their ability to learn from failures”. - Diego May, Junar
  12. 12. 22 23 from the much needed internal discussion of what’s not working and how to fix it. On the other hand, by not sharing it with others, the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneurs’ mistakes. A well-educated and trained talent pool • Big corporations and skills development • Developers are the new rock stars • Talent wars: David and Goliath For the past two decades, Costa Rica has been able to attract a growing number of direct foreign investments, and has convinced multinational companies like Intel, HP, IBM, P&G, Amazon, McKinsey, Accenture, VMWare and others to open or expand their operations in the country. According to data from CINDE, by 2013, nearly 87,500 Costa Ricans worked for 250 multinational companies, many of them in service industries, representing 5.8% of the country’s GDP that year. The most commonly cited reasons for choosing Costa Rica include its high levels of education, widespread knowledge of the English language, and cultural and geographical proximity to the United States. Without a doubt, world-class companies’ absorption of a large part of the educated workforce has impacted the country’s labor market. It has also impacted the startup community. The recent downsizing of Intel’s operation in Costa Rica in 2014, for example, left 1,500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company. Many chose the latter. In this sense, several interviewees reported that multinational training programs are raising the skills of the workforce, and that these skills could later serve the creation of local companies. Others, however, do not view the effects of multinationals as positive for the startup ecosystem. With vast resources, benefits and perks, many of these large companies are talent magnets, leaving local startups in a tough position to compete for the talent they need. This also creates distortions in the labor market, where the demand for profiles such as developers with a university degree by far exceeds the supply, raising wages to a level that no startup could dream of competing with . 2 In response, some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the “entrepreneurial spark,” and who favor a more creative, relaxed and horizontal environment in which contributions are heard and bureaucracy is low. For entrepreneurs, the talent wars between multinationals and startups means an increase in the cost of starting a venture. With a higher cost of opportunity, many find it harder to turn away a dependable salary for the relative uncertainty of startup. Lack of saving and investment culture • Saving habits and the cash to get started • What people do with excess cash According to 2014 report from the World Bank, Costa Rica has one of the lowest rates of savings (represented as % of GDP) in the nations for which there is data. Costa Ricans not only lag behind developed nations in their savings habits, but also Latin American countries such as Mexico, Chile, Argentina, Colombia, Nicaragua, Uruguay and Bolivia. In very broad terms, if the majority of the population is unaccustomed to saving, entrepreneurs are less likely to have startup capital of their own, and the availability of “Costa Rica has many advantages. We are the perfect laboratory to generate innovation-based startups because technical education is good, adoption of technology is high and we are a very horizontal society. This helps a lot in developing and testing business models that you can later scale”. - Juan Carlos Martí, CIE TEC 2 During an informal consultation to several software startups, they reported the rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4,000 to as high as $8,000 per month. Culture
  13. 13. 24 25 “Red tape is one of the main obstacles to start companies. Just obtaining a patent or health permit, registering with social security (CCSS) or opening a bank account requires huge amounts of effort. This forces many entrepreneurs to remain informal” - Claudio Pinto, Fairplay Labs “casual” investors that comprise the friends and family category will also be low. In more developed ecosystems, the low capital requirements of very early stage ventures are usually covered by savings, either from the founder or his close circle. While the investment supply is clearly influenced by many factors other than saving habits (see Funding), these habits serve as a foundation for many others. Even among individuals or families with excess capital that they could potentially invest in a new company, there is not a widespread culture of investment. In other countries like the United States, where there is an active stock market, the general public is familiar with the concept of investing, either through passive vehicles such as pension plans (401K’s) or through more active ones such as stock trading. In Costa Rica, although it is possible to invest via the Mercado de Valores, it is not a common practice among the general public. Individuals with excess capital usually keep it in very safe instruments such as bank bonds, or in saving accounts. Strong cultural bias toward socially- minded businesses • The social appeal • Making money while creating impact • Organizations with a social focus Severalintervieweespointedoutthatanunusuallyhigh numberofinitiativesintheCostaRicanstartupecosystem favorsocialorenvironmentalcauses.Eventssuchas Startup Weekend,forexample,usuallygearedtowardthe youngergenerationsofaspiringentrepreneurs,seemany projectsthataresocialinnature. This apparent social/environmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds, both of which are still nascent in the region. According to organizations that promote the field, one of the main challenges is to create truly profitable business models that generate both social and economic value. Many of these initial projects focus extensively on their social/environmental impact, while neglecting revenue or profitability, making them more similar to NGOs. Organizations like VIVA focus their knowledge-sharing platform, workshops and competition (the Stephan SchmidheinyAwards), on ventures that prove to have social and environmental impacts. Social Shot is another initiative that specifically targets social entrepreneurs, and has been growing in attendance and reach. This shows the significant interest that local entrepreneurs have in these types of venture. Opportunities to develop startup- friendly regulation • The ease of doing business in Costa Rica • The dilemma of informality A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business, expressing that it is usually a time consuming endeavor that includes numerous forms, complicated requirements and long lines. Despite this perception, Costa Rica has been gaining ground, according to the Ease of Doing Business Index, which showed the country in 58th place in its latest ranking, compared to 79th place the previous year. Ease of obtaining credit and paying taxes are identified as the major improvements. However, aggregate measures such as the ease of doing business index might not be painting the whole picture, particularly in the case of startups. As interviewees reported, the main problems lie in the fact that startups are expected to comply with the same regulations, and sometimes even the same fees, as much larger companies. This causes many startups to work informally, while trying to become sustainable. Culture
  14. 14. 26 27 27 The Startup Community. b.FINDINGS The Startup Community The startup community is comprised of entrepreneurs, mentors, incubators and programs, entrepreneurship-related events and competitions, universities and research centers, accelerators, investors and firms that provide services to starting companies. Although individually each actor plays a role, in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community. The SME – Startup distinction • How they are different • Why the difference matters As the startup community develops, and new initiatives to help entrepreneurs join in, there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise, or SME. This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments, or incubators attempting to define their value proposition and target audiences. As observed in our interviews, the general understanding is that SMEs are traditional businesses such as bakeries, retail shops, artisan groups, or small restaurants, usually run by the owners or their families. These businesses are asset intensive, as they often need to purchase some sort of equipment, and begin producing income as soon as they open. Their growth can vary, but is usually organic, as they are competing in very crowded industries— sometimes against very big players. The so- called subsistence startups, or one-person businesses, also fall under this category. The term “startup” is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets. Startups don’t always need a lot of assets, but instead rely on knowledge and technology. Their revenue models don’t always generate income immediately, but network effects, rapid adoption and global reach can make their growth exponential. They are often cash hungry and have longer return horizons on investments. While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included, it’s clear that the COMMUNITY
  15. 15. 28 29 Mentorship opportunities also stem from personal relationships; however, many organizations are already doing a decent job of providing access to these types of people, making the personal network less relevant when seeking a mentor. After all, it’s easier for a person to donate their time to provide feedback on a new venture than it is to invest $10,000 in seed capital. Individual initiatives don’t always fit well together • Chiefs of small tribes • The lack of a collective memory • Repeated efforts, diluted impact • The competitive dynamics between organizations Thisstudy’smappingeffortrevealednearly50 organizationsorinitiativesthatareparticipating inCostaRica’sstartupecosysteminonewayor another(consultthefullmapofactorsatwww., however,isthedegreetowhichthese organizationsworkinisolation.Asdiscussedinthe sectionCostaRicanCulture,theculturally-rooted tendencytowardlowtrustandlowcollaboration perceivedaboutentrepreneurscanalsobe noticedamongprograms,incubators,accelerators andeventorganizers. This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one other’s criteria for supporting startups. Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs, partially due to the fact that they are working independently from one another. Often, entrepreneurs that finish early stage programs find themselves in a sort of “no man’s land,” not being accepted by later stage organizations, nor finding the right financial support to continue growing. Indeed,eachorganizationseemstohavebeen evolvingandimprovingintheirofferingto entrepreneursoverthelastfiveyears.However,each isdoingsothroughitsowninternalprocessesand experiences.Atroublingimplicationfororganizations workinginisolationisthatthereisnopossibilityof benefitingfromtheexperienceofothersinaway thatallowsthecommunitytolearnfromitscollective mistakes.Thisunspokenmistrustpreventsmany entrepreneursfromseekingadviceoraskingfellow organizationsforhelp,evenincircumstanceswhere itwouldmakesense. Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day, competing for a reduced audience and diluting the impact that each might have on the community as a whole. Though there may not be much money to be made in helping emerging entrepreneurs, the dynamics through which these organizations relate to one another are those of a highly competitive business environment. There is little, if any, sharing of practices, communication channels or lessons learned. While, in some cases, organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesn’t seem to be the only factor in play—since these opportunities don’t come by often. If the motivation isn’t financial, then why aren’t organizations reaching out in search for help or, at the very least, to coordinate efforts? Thereis “There’s not a memoir that allows us to learn from what has worked in the past and what hasn’t. That’s why we keep making the same mistakes” - Tomás de Camino, co-founder of the Foundation Costa Rica for Innovation. requirements, growth potential and the support needed are very different, and a clear distinction should be made in order to better serve each. Based on our interviews, the local startup community tends to favor startups or innovation-based businesses in competitions, incubation processes and events, and entrepreneurs are encouraged to think beyond the notion of SMEs. For the purposes of this report, the term “entrepreneur” is used to describe the person who starts any type of business. While the term “company” is used in the broad sense, including both, the term “startup” is used specifically to describe an innovation-based business. The “who” before the “what” • The project or the entrepreneur • The limitation culture imposes on imported models • Vital personal networks Business in Costa Rica, as in other Latin American cultures, is based on relationships. The boundaries between the personal and the professional realms are often blurry and in general, there is a concerted effort to get to know the person you’re conducting business with. In contrast with cultures that focus on the project (“the what”), Costa Ricans tend to focus on the person (“the who).”). In one interview, the director of a local incubator shared how he had to modify his model, which had initially been based on principleshehadseeninSiliconValley,precisely becauseofthisdifference.“Theywerebasedon projects,”heexplained.“Butforthelocalculture, what’simportantiswho’sbehindtheproject.”Hehad concludedthat,forthelocalecosystem,thevalue chaindoesnotstartwiththeproductbut,rather, withtheperson.Intheresultingmethodology,the incubatoressentiallytriestounderstand“whothe jockeyisbeforebettingonthehorse.” In this context, personal networks—or access to the right people with relative ease—becomes crucial to make things happen. In the case of the Costa Rican startup ecosystem, where organizations are still developing and figuring out how to connect and work together, our research says that who you know plays a bigger role in a startup’s success than what you know. In the face of the country’s virtually non- existent venture capital industry and scattered angel investors who work individually (see Funding), personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started. When institutions do not yet act as matchmakers between potential investors and entrepreneurs, personal, trust-based relationships fill in as a catalyst for funding. Of the nine entrepreneurs interviewed, eight had received funding. Of these, six had accessed it through personal connections. This shows that, at the earliest stages, when risk and uncertainty are highest, a contact list of people who trust you is the most viable alternative. “I see good individual efforts but they are not very collaborative. Each one seems to prefer to be the chief of a very small tribe”.- Carlos Mora de la Orden, COMMUNITY
  16. 16. 30 31 entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies, partly because of the lack of clarity regarding how each could help—so they just applied to find out. While, arguably, each experience yields lessons, the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one. Organizations and their sustainability • The funding of an incubator in the absence of seed capital • Government support • Links with academia and larger organizations • Short-term thinking: survival mode Perhaps the most pressing challenge facing supporting organizations such as incubators, accelerators, programs and events, is the need to become financially sustainable. Because early stage investment is not yet a common source of funding (see The Gap: Seed or early stage funding), incubators have been unable to rely on a model commonly used in other ecosystems, in which the organization invests in the entrepreneur and gets a return once the startup is funded. Charging entrepreneurs for their services has not been a widely used practice, mostly because it is assumed that entrepreneurs won’t have enough resources coming out of the gate to pay for the support they need. Some organizations, however, such as the Founder Institute, operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program, they won’t likelybeabletoincorporatetheirbusinessandface the expenses associated with founding a company. (For costs associated with every available program, see the mapping at ). UnlikeotherLatinAmericancountriessuchasChile, governmentfundinghasneverbeenaconstant sourceoffundingfororganizationsinCostaRica.The onlyrecentexceptionbeingaperiodbetween2013 and2014,duringwhichtheprogramCapitalSemilla oftheBancadeDesarrolloinitiativecreatedasource ofrevenueforincubators,whichhelpedsomeof themintheirinitialyears.Undertheprogram,each incubatorwouldnominatestartupstobefundedfor amountsupto$100,000.Ifselected,theorganization wouldbeabletokeepasmallpercentageofthe funds,openinguparevenuestreamformanystarting incubators.However,theprogramwashaltedafter twoiterations (see Government money),leaving manyorganizationswithoutasignificantsource ofincome.Thishasforcedmanytoreinventtheir businessmodelandexplorenewwaystofinance themselves. Incubatorsstemmingfrompublicuniversitiesoften receivetheirsupportintheformofstaff,facilities and,insomecases,seedmoneyforincubated startups.However,thistypeofassistanceislimited, whichdrivesthemtofindself-sustainingmodels thatprovidefinancialindependence.Whilethe servicesofsomeincubatorsremainfreetothe entrepreneur,asinthecaseofUNAEmprendedores, otherinstitutionslikeUCR’s AUGEhavebegun toexperimentwithatier-pricingmodelinwhich studentsarecharged(ifanything)lessthanworking professionalswhocanaffordtopayfortheservices. In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs, government or institutional economic assistance continues to be scarce and seed investment can’t provide a return, their economic sustainability is fragile. This forces them to operate in an extremely lean manner, with small staffs and limited resources. This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and, to some extent, to view these actors as competition for the limited resources available. As an example, one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one. The subject of funding was the first to come up, and when she told the contact that she had secured some funds, he quickly steered the conversation towards his organization selling its services to hers. Sensing more interest in the short-term gain of accessing funds than in Many are trying to do the same thing and we are not linking our initiatives together. In our case, for example, we prefer to concentrate on generating more deal flow, our most important role in the ecosystem, rather than try to build an investment network.” Luis Alonso Jiménez, Auge littleconsensusontheanswertothisquestion. Somepointtoego-drivenpersonalitiesthat wanttobeinthespotlightwhiletheytriumph overothers.Otherintervieweessuggest it’smerelythateachorganizationbelieves toostronglyinitsown“secretrecipe,”and thereforeisn’tinterestedinlisteningtoor sharingitsformulaforsuccesswithothers. The undifferentiated and, in some cases, extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs, who have difficulty understanding what each organization aims to do, and how they can help. Many of the “Incubators or accelerators should be more open: if there’s a workshop or course, entrepreneurs from other organizations should be invited too. Allowing others to see how they do things and share those practices helps everybody because you incorporate different points of view.” - Juan José Muñoz, Open Future / POOM COMMUNITY
  17. 17. 32 33 Intervieweesfounditextremelyhardtoestimate thisnumber;however,itwaswidelyconcededthatit couldn’tbemorethan500.Evenifthisistheamount ofstartupslaunchedlastyear,itwouldputCosta Rica’sstartupdensityataround10.4. It is then possible to argue that, although some of the perceived lack of quality of Costa Rican startups might be due to inexperience, it’s clear that there are not enough initiatives—both in absolute terms due to the size of the market, and (particularly) in terms of startup density. Simply put, very few startups are launched each year. A low volume of projects has many implications. First, although all programs and incubators have selection processes, the lack of volume in applications could, in some cases, force the bar down. This drives the organization to devote already scarce resources to startups that might not be ready, or might not result in anything scalable. This, in turn, keeps them from striking the success that drives credibility and gains them further support. Second, the low volume of startups means a low demand for service providers who could eventually support young companies, making a resource base difficult to develop. In more mature ecosystems, the resource base that serves startups has surged from the aggregated demand that comes with scale. Few organizations are in a position to address the so-called critical mass problem, since it’s necessary to start early on—as early as school. Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science, Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option. These efforts are obviously long term, but are indispensable for feeding the top of the funnel. “Because most organizations depend on the same limited pool government grants to survive, they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist. Therefore, sustainability of most actors is very fragile, anyone can disappear at any moment”. - Allan Boruchowicz, Carao Ventures true collaboration, the idea was abandoned and both went their separate ways. Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term, sustained collaboration within the startup community. The critical mass problem • Small markets and economies of scale • A matter of numbers • On startup density • The problem with low volumes • How to feed the top of the pipeline Costa Rica is a fairly small market. With just 4.8 million inhabitants, reaching economies of scale is a challenge for any industry. According to our research, the development of the country’s innovation and startup creation capacity is largely influenced by scale. Entrepreneurs, policy makers and directors of incubators agree that, generally speaking, projects don’t seem to be at the desired level of quality. A common theme during the interviews was that “there aren’t enough good projects.” This could be a quality issue, in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups. Or, it could simply be, as many interviewees suggested, a matter of numbers. Statistically, there simply may not be enough startups to produce a super star. Justasareference,thestartupdensity(the numberofstartupsper100,000people)in theUnitedStatesreached130.6,accordingto the2015 Kauffman Index ofStartupActivity. Whilenooneistrackingnational-levelstatistics forCostaRica,agoodindicatorofthenumber ofstartupscreatedistheaggregatenumber ofprojectsthatgothroughavailablesupport programs,incubatorsandaccelerationprocesses. COMMUNITY
  18. 18. 34 35 werealsomentionedasshortcomingsofmany events.Inmostcases,thereisaguestspeaker, usuallyanentrepreneur,whoshareshisorher storywiththeaudience.Openmicsafterwards veryseldomattractparticipants,soattendants endupplayingapassiveroleandbeingonlymildly engaged.Arguably,thisimpactsretention—the prerequisiteforcommunitydevelopment.One possiblesolutionposedbytheintervieweeswas todesigntheeventsinawaythatislessfocused onlisteningtooneperson,andmoreaboutsharing experiencesinahorizontalformat.Muchlike workshops,eventscanencourageparticipantsto bepartoftheexperience,ensuringthattheyare participant,ratherthanspeaker,focused. Startup Competitions and their role in providing visibility and access to resources • A showcase for startups • An inefficient source of funding • Validation and credibility In the same way that events have been sprouting up in recent years, startup competitions have also increased in number. Of the six competitions identified in the current mapping, five had their first edition in the past two years alone. Accordingtoourinterviewees,competitions currentlyserveseveralpurposes.First,they helpcreateawarenessaboutentrepreneurship amongthegeneralpublic,whichpushestheentire ecosystemforwardbyengagingmorepeoplein thesubject.Bymakingstartupsvisible,aspiring entrepreneurscanfindinspiration,rolemodelsor, simply,thevalidationthatstartingabusinessisa viableoption.Thisvisibilityalsohelpsengageother stakeholderswhoareusuallynotinvolvedinthe ecosystem,suchasprivatecompanies,whichare takingnotesandfindingwaystoeithercontribute totheecosystemthroughsponsorshipsorto incorporateinnovationandentrepreneurshipinto theirownprograms. Thesecondpurposeisthatofbecomingaproxyfor resources.Manyoftheentrepreneursinterviewed wereluredtoparticipateinseveralcompetitions bythepossibilityofwinningthefirstprice,usuallya modestamountthatcouldbeusedasseedmoney. Butcompetitionsareaninefficientfundingsource, astheprizesofferedbylocalorganizationsare typicallynotmorethanafewthousanddollars, andthosewithaninternationalreachandlarger prizesusuallyrequireseveralqualifyingrounds andregionalcompetitionsbeforetheawardis granted—aprocessthatcouldstretchinmonths andtakeawaylotsoftimeandfocus. However,competitionscouldserveanotherpurpose, whichistoprovidevalidationandgaincredibility. Winningacompetition,evenifnomonetaryprize isinvolved,canhelpentrepreneursbuildtheircase infrontofinvestors,acceleratorsororganizations abroad.Inaddition,themediaexposurecanputthem inthemapforconsumersandpotentialpartners. One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor. Since its beginnings in 2008, it has reportedly analyzed 1,400 business opportunities and trained up to 950 entrepreneurs. Coworking spaces • Permanent cross-pollination • A new concept in Costa Rica • The sustainability challenge Justaseventsservethepurposeofcreatingconnections betweenpeoplefromdifferentbackgroundsandskill sets(seeEntrepreneurshipeventsandtheeffectsof cross-pollination)coworkingspacesprovidethesame opportunityinamorecontinualmanner.Whereasevents comeandgo,andareusuallycenteredaroundaspecific topic,thesecollaborativespacescreateapermanent environmentforentrepreneurstomeetandshareideas. Though still scarce in Costa Rica, organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating “We need a critical mass of innovative startups to spark things up. However, it is not only a matter of encouraging people to take the leap and become an entrepreneur, it is also about pointing them to the right resources and guiding them in the process” - David Bullón, Director of Innovation MICITT Entrepreneurship events and the effects of cross-pollination • More events, more discussion about entrepreneurship • Same old group of buddies • The value of consistency • Engagement and participation as a path to retention Every startup ecosystem event fulfills the very specific and important role of cross-pollination: bringing different people together around their interest in entrepreneurship. The rationale is that people with different profiles—designers, business administrators, engineers, developers and others—rarely have common spaces where they can meet and share ideas. These events create opportunities to find inspiration and meet people to collaborate with. EventsintheCostaRicanecosystemvaryinfocus andformat.Asentrepreneurshipbecomesmore mainstreaminthecountry,however,theyhave undoubtedlybeengrowinginnumber,aswellas inaudiencereached.Nineeventswerelaunched inthelasttwoyearsalone,withexpectationsof becomingperiodical.(foracompletelist,seethe Despitethegreatthingsthateventsaccomplish bybringingtheentrepreneurialagendatothe public,manyintervieweesagreedthatthese effortsshowalackofdiversity.Perhapsduetothe combinationoflowcriticalmassandtheisolation anddisconnectionunderwhichmostorganizers operate,manyenduphostingthesamegroupof people.Whilethiscouldbeservingtostrengthen thegroup’scommitmentandidentity,itimpacts diversity.Aswithotherfactors,theaffiliation criteriaforjoiningeventsseemstorevolvearound familiarityandfriendship,morethanthepurpose ofmeetingnewpeople. There are, however, other perspectives on the impact that events are having on the ecosystem. For another interviewee, the value should not necessarily be measured by the number or type of attendants, but in terms of continuity and consistency. In this sense, initiatives that have been around the longest, such as First Tuesday, have carved out a space precisely because of their continuity, and their underlying community, the meetup channel #chepetec, is one of the largest in the country. An initiative launched in 2015, called Story Tellers, bets on a format that invites all kinds of professionals—from entrepreneurs to chefs, from corporate employees to actors—to share their stories and inspire others. With storytelling at its core, the program not only seeks to entertain and connect people, but also to spread the entrepreneurial mindset. Alackofstructureandalowlevelofparticipation COMMUNITY
  19. 19. 36 37 transparently, the transactional nature of the approach reduces the possibility of building a trust-based relationship. Entrepreneurs, sometimes fearing that a more experienced business person will take advantage of them, pass on the offer, resulting in both parties missing out on the opportunity to work together. Resource base: Service providers can’t always adequately serve startups • The different needs of startups • Pro-bono and the exchange of services • Equity-based compensation • The problem services paid by government funds A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to. Every startup needs legal, accounting, graphic design, web development, banking, payment processing, social media management and other services. However, these young companies often can’t access these services if the providers don’t adapt their offerings to startups specific needs. In Costa Rica, incorporating a new business can cost entrepreneurs anywhere from $500 to $1,500, depending on the firm they hire. Intellectual property advisory, one of the most relevant services when developing a new product or technology, can cost thousands of dollars. While there are currently no legal firms specializing in startups, there are examples of firms that have begun to serve this segment by tailoring their offerings, making them more accessible to entrepreneurs. Arias & Muñoz, for example, has partnered with local research centers and incubators to provide intellectual property advisory to startups. Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost- effective legal assistance. In the case of services such as graphic design, web development, social media and communication, there are many options for entrepreneurs, since in these fields it’s common to find young professionals who not only better understand the startup reality, but in some cases are entrepreneurs themselves. It is common to see pro-bono work or the exchange of services with little or no money involved. In addition, an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup, or to freelance for a small fee. Payment processing, banking and other financial services are probably the least in touch with the needs of a startup. Numerous requisites, time consuming processes and, most of all, difficulties in processing online payments, have driven local entrepreneurs toward global solutions such as Stripe and PayPal. In an effort to make costly services more accessible to entrepreneurs, some firms have explored models seen in other ecosystems, in which the company works for equity participation rather than upfront compensation. This has had synergies. Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals: first, that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities; and second, to connect with the community, meet other like-minded people, and be part of events and other activities. This second aspect of the value of coworking spaces is often overlooked, and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and, thus, fail to become a relevant space in the ecosystem. While in other cities around the world coworking spaces have been present for over a decade, the concept is fairly new for Costa Rica, which gives pioneers the task of educating potential customers on the advantages of the model. Like any other industry, this requires resources, whether in terms of time or marketing budgets. This is hard enough for any entrepreneur, but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place. This leads to similar sustainability challenges as those faced by incubators. In the case of coworking spaces, there is no issue with charging customers for their services, but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business. Diversifying beyond space rental is a strategy that other coworking spaces have tried, particularly in Latin America, where the environment is similar to that of Costa Rica. Offering workshops targeting private companies, seminars, and services required by startups such as accounting, social media management and others, have been common revenue streams to supplement the model. Mentors and their supporting role • Mentors as connectors • Giving first A vital part of every startup ecosystem, mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones, usually for the sole interest of helping out. Mentors, however, can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community. In Costa Rica, not all programs or incubators incorporate the participation of mentors, so proactivity and growing your personal network is step one in finding a good mentor. One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute. Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program. Often, these connections generate further value in the form of continued mentorship, the acquisition of new customers and, in some cases, joint ventures. Although the interviewees reported that most mentors assume the role selflessly, in the spirit of helping entrepreneurs, there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young company’s equity. While this is not necessarily a problem if handled “Our resource base for startups is still weak. We lack companies willing to work under conditions that are aligned with the startups’ needs and development stage, such as lower entry prices, equity or stock options deals, etc. Accessible tools and software are not widely known”. - Allan Boruchowicz, Carao Ventures COMMUNITY
  20. 20. 38 39 mixed results, the main challenge being the reluctance of local entrepreneurs to concede equity, even at stages when the business is not yet in place (see On sharing risk and equity…). Other strategies include partnering with assistance programs or grants, in which the company providing the service is paid by a third party, usually a government institution. The main criticism for this model is that it creates incentives for professionals to go after the funds, rather than focusing on creating value for the young company. According to one interviewee, this breeds all sorts of opportunistic “experts” in entrepreneurship, innovation and business development, which end up hurting the startup community by focusing on the short-term gains. Connectors: Minding the gap between entrepreneurs and investors • Unfamiliar territory for both • The function of matching expectations • Trust by proxy Almost unanimously, the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica. Though there are enough wealthy individuals and families with the potential to become investors, the deals, especially at an early stage, aren’t happening (see Scattered angels). As reported by the interviewees, most prospective investors come from family businesses and traditional industries, and are not very familiar with the valuation methods, accustomed equity demands and investment horizons associated with startups. Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment). Although best practices from foreign ecosystems are widely available online, few entrepreneurs take the time to learn how to handle a round of angel or seed investments, or even define their funding strategy. The few that do, have the task of sharing what they’ve learned with potential investors, as it is still uncharted territory. To bridge the gap of unmet expectations and the lack of investment knowledge, some actors in the local ecosystem have begun to fulfill an intermediation role, seeking to educate both sides in order to match investors and entrepreneurs. Investment clubs tied with accelerators are the clearest example of such organizations, though individuals with connections on both sides of the investment market also perform this role. Successfully gathering a group of investors around a club, while also supporting startups that are prospects for funding, accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs. Thisroleisparticularlyimportantduringthis earlystageofthedevelopmentofventurecapital, whenbothinvestorsandentrepreneurscan benefitfromabetterunderstandingofhowthe processworksandwhatthebestpracticesare. Trustinthisintermediationisoftenthegluethat holdseverythingtogether,asbothsidesseethe connectorassomeonewhoislookingoutfor themandadvocatingfortheirbestinterests. An important caveat is that, though we call this process intermediation, it doesn’t follow a strictly transactional logic and, although individual connectors in some instances do benefit financially from their role, most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit. “Locally, processing payments is too complicated and there are only a handful of options. We had to incorporate the company in the United States so we could process payments using Stripe. That means we eventually have to report income in the US and pay taxes on it” - Vinicio Chanto, Slidebean “We are lacking more connectors, people that can bring together investors and entrepreneurs” - Juan Carlos Martí, CIE TEC COMMUNITY
  21. 21. 40 41 Reinventing the wheel: A lack of connection with more developed ecosystems • The bridges to U.S. ecosystems • Craft solutions • The few that have been out • The knowledge transfer function Asdiscussedabove,actorsinthestartup ecosystem—bothentrepreneursandsupporting organizations—seemtobeoperatinginindividually, withlittleopportunitytolearnfromoneanother’s bestpracticesandexperiences.Thisalsoseemsto applyatamacrolevel,inwhichlocalactors(witha fewexceptions)don’tconsiderexperiencesfrom otherecosystemsasasourceofknowledge. Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica, including its cultural and geographical proximity to the United States, the prevalence of English and the high adoption of technology. These can serve as bridges to ecosystems in the U.S. cities Ofcourse,everyecosystemdevelopsunderits owndeterminantsandconditions,andculture playsasignificantroleinhowstakeholders interact.However,thereismuchtobe learnedfromtheexperiencesofotherstartup communitiesaroundtheworld,eveniftheydon’t sharethesamecharacteristicsonthesurface. These“bestpractices”cansaveentrepreneursand organizationssignificanttimeandresourcesby helpingthemfigurethingsoutmorequickly. Accordingtoonelocalentrepreneurwe interviewed,thevalueoflearningfromthe experienceofotherswasoneofthemost importantlessonsacquiredinthefouryears sincelaunchinghisstartup.“We’vemadealot ofmistakesalongtheway.Ifpeoplewithmore experiencehadshowedustheropes,wewouldn’t havereceivedsomanypunches.Thatwouldhave savedusalotofresources,particularlytime.”Now, hemakesahabitofconnectingwithotherstartups locallyandabroadtoconstantlyseekfeedback, shareexperiencesandlearnfromthem. In spite of this, so far there are examples of startups like Slidebean, Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems. In the case of Slidebean, the team has participated in Startup Chile, Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience, according to Vinicio Chanto, allowed them to find their path to growth: The elusive success story: A precedent the community is waiting for • In search for the Costa Rican Waze • Startup purists and the success stories of the 90’s • The Keylor Navas effect • A home run for investors Theelusivesuccessstorythatcouldprovide inspirationforentrepreneursandearnstartups credibilityamonginvestorsis,accordingtomany interviewees,yettocome.Whetherthisisdue tothehistoricallylowprofileofmanysuccessful entrepreneurs,thelimitedmediacoveragethe topichasreceived,orthelackofconcretesuccess stories,thetruthisthatthecommunityisunable toidentifyaCostaRicanequivalentofUber,Waze orSpotifyasanexampleoflocalstartuppedigree. TherehaveindeedbeensuccessfulCostaRican startupsinrecentdecades,butthelowvisibility discussedabovehaskeptthesecaseslargely unknowntothegeneralpublic.Somearguethat, whileentrepreneursfrompreviousgenerations didsuccessfullycreate,growandselltheir companies,theyweren’tnecessarily“startups” inthestrictsenseoftheword.Oneinterviewee describedacrucialdistinctionbetweensoftware companiesthatperformoutsourcedworkfor developedmarkets,andstartups,whichdevelop theirownproducts.Whiletheformerisessentially aserviceprovidedatalowercost,thelattergains itscompetitiveadvantagefrominnovationand actuallyresolvingaproblem.Ifyouagreewiththis distinction,thenyoulikelyfeelthatno“superstar” startupshaveemergedfromthelocalecosystem. However,severalfoundersoflocalcompanies haveundoubtedlymademillionsuponexit.In anycase,neitherstartupsnormoretraditional companieshavebeenvisibleenoughtobecome thesuccessstoryeveryoneaspiresto. Forentrepreneurs,theprecedentofastartup thatmadeitbigisn’tjustasourceofinspiration. Equallyimportantitisthevalidationthat entrepreneurship,hardasitcanbe,doespayoff. Thisisparticularlysignificantintheearlystages ofecosystemdevelopment,whenstartingone’s owncompanyisn’tacareerpaththatmany youngadultsconsider.JustasKeylorNavas demonstratedthataCostaRicancanplayamong thebestintheworld,manythinkarunaway successstoryfromourstartupecosystemis what’sneededtoboostthecountry’snext generationofinnovatorsandentrepreneurs. For investors, a success story—particularly if it was funded locally—would be proof that investing in startups pays off. The high valuations, extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns. A common saying in the venture capital industry is that out of every ten startups an investor chooses, six will likely lose money, three will more or less break even, and one will make up for all the losses. It’s one thing, however, to be familiar with the saying, and entirely another to have seen that one “home run” or, better yet, to know the fellow investor that helped hit it. “Many efforts to support entrepreneurs are ‘craft’ solutions. We’re attempting to solve local problems that organizations in other ecosystems abroad have already solved successfully.” - Josué Fumero “Because there are no success cases, there is no credibility among investors. And if there are, they are unknown. Parties involved in private transactions don’t have any incentive in having the deal be known, so in the end nobody finds out.” - Paul Fervoy, Miweb “Participating in world class programs is very tough because they challenge at a whole different level. While in Costa Rica you might be celebrated for a small achievement, over there, you are one of the little ones. But it is this toughness that allowed us to grow 25X after one of the programs.” - Vinicio Chanto, Slidebean COMMUNITY
  22. 22. 42 43 Somebelievethattheseconnectionswith morematureecosystemsarethekeytospeed thedevelopmentofthelocalone.Whilesome incubatorslikeCIE-TEChavebetonlearning fromforeignecosystemstoreinventthewaythey supportentrepreneurslocally,themaindriverof thisknowledgetransferiswithoutadoubtthe entrepreneursthemselves.Byfocusingnotonly onhelpingthemtoresolvingtheirchallenges,but alsosharinglessonslearned,theseambassadors couldserveastheconnectorsthelocalecosystem needs. An umbrella organization • A united front for lobbying • A more powerful platform The disconnection between the actors within the ecosystem and their narrow focus on their specific role, limits their ability to see the bigger picture and consider the needs of the community as a whole. During policy discussions, for example, individual members represent the needs of their own organizations, rather than acting as a united front. As one government official put it, as long as the community lacks representation as a community, its advocacy and lobbying capacity is virtually nonexistent. Here, disconnection is truly hurting the ecosystem. Being unable to solve the organizational challenge of uniting behind a common agenda, the members of the ecosystem limit their influence on public policy. Twointervieweespointedouttheneedforsome typeofumbrellaorganization,underwhich stakeholderscoulddiscusstheneedsoftheentire community,defineaunifiedagenda,andadvocate fortheirinterestsfromamorepowerfulplatform. Thisassociation(orfederation)couldprovide thepoliticalparticipationcurrentlyheldbysome chambers,andfinallyallowentrepreneursto influencepublicpolicyinameaningfulwayforthe startupcommunity. “Little by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges. Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroad”. - David Bullón, Director of Innovation MICITT COMMUNITY
  23. 23. 44 45 Ideal stage of life to start a company • Launching during your 20’s • The opportunity cost of the 30’s • The advantages of mid-life entrepreneurship We interviewed entrepreneurs from different age groups—from 20-somethings to those well into their 50’s, and the stage of life had clearly been a key determinant in the decision to start their own company. For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one. Most of the cases reported were still economically dependent on their parents, and had few responsibilities, making the risk of failing a less costly one. The majority of these ventures begin with little or no money, and the entrepreneur’s lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs, , and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3. Though unmeasured in Costa Rica, worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts. For those over 30, facing the risks associated with starting one’s own business is more difficult, as economic needs grow with personal decisions such as marriage, buying a home or having children. These entrepreneurs also reported that the cost of opportunity was higher. In oth gh salary and the comfort it afforded. They also, however, identified many advantages to having started the entrepreneurial journey later on in life. Work experience and contacts within the industry, for example, increased the chances of success. Financially, via savings or access to credit, they were also less dependent than their younger counterparts on external funding. Finally, for those entrepreneurs over 45, economic stabilityhad allowed them to better manage risk. Here again, experience and contacts also seem to have improved their chances of success. Within this age bracket, however, most interviewees reported that theywere not “first-timers,” so, while theymight have started a companyin their late 40’s or 50’s, theyweren’t coming from a situation of regular employment. These trends are, of course, not unique to the local startup ecosystem. The same tendencies can be observed in cities around the world. What is particular to this ecosystem, however, is how the risk of starting a business is handled in the various stages of life, in light of the cultural traits described in the section “Costa Rica and its Culture.” For instance, the decision to start a company is tougher for entrepreneurs who would be walking away from a secure, well-paying job, particularly when coupled with The emotional price of becoming an entrepreneur • The lonely path • Being the goalkeeper Choosing to start a company is, without a doubt, a life changing decision. Leaving the comfort of a stable salary, risking your savings and asking others to join you in the adventure without any guarantee that things will work out, can have an emotional downside. Unlike a demanding job, as an entrepreneur, you are ultimately responsible for the wellbeing of the company and its team, and that can be difficult to handle. As discussed in the section Costa Rican Culture, the local society is still relatively unfamiliar with entrepreneurship as a career choice, and close networks such as family and friends don’t always understand or support the entrepreneur. This can make a startup venture feel like a very lonely path. All of the interviewees agreed that, although exciting, leading a companytakes a toll on other areas of their lives. Long hours make it difficult to find time for family, friends or other activities. For three of the entrepreneurs interviewed, having a supportive familyor spouse makes all the difference, and they suggested that negotiating beforehand with loved ones that will be affected bythe choice of starting a companyshould be a top priority. The entrepreneur. c.FINDINGS When I was an employee there was also lots of work but it wasn’t equally stressful because now I’m the goalkeeper. With a startup there’s stress when things are going badly but there’s also stress when you are growing, there’s always stress! What helps me is talk to other entrepreneurs to let off some steam” - Alejandro Brenes, Enertiva Entrepreneur 3 This may have more to do with the fact that most incubators are linked to universities, rather than an explicit intention to support young entrepreneurs.
  24. 24. 46 47 extremely slow progress, or simply never getting off the ground because their founders keep waiting for them to grow before quitting their dayjob.This chicken or the egg problem leaves manyentrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires.At this juncture, manyentrepreneurs point to angel investment as a workaround.As Eric de la Goublaye of the companydeLaGuayaba explained, “I can’t focus 100% on the startup, because I keep having to offer services to make some moneyon the side. If I had some funding, I wouldn’t have to juggle so manythings to earn an income.” An alternative to this resistance to commit full- time to the startup, otherentrepreneurs advocate for the “part-time as a bridge” strategy.The founding team of Slidebean reported that they followed this formula in the earlystages of their venture, when moneywas tight and theyhad notyet raised capital. Bytaking on consultancy projects, theywere able to ease the pressure of the startup producing sufficient income for them to live on. Anotherpracticementionedinreferencetothe dilemmaofwhetherornottoleaveyourdayjob, isasortof“pre-launchacquisition,”inwhichthe entrepreneurasksalargecompanytostakethe projectanddevelopitinhouse,removingany riskforthefounderbutcompletelylimitingthe upsidebyturningovercontrol.Inafewexamples provided,theentrepreneurseffectivelybecame thecompany’semployee,andthestartupideaa productwithinit.Thistacticallowstheentrepreneur toworkonwhateverheorshelikeswithoutever takingarisk.Manyargue,however,thatitonly createsvaluefortheacquiringcompany. On sharing risk and equity: The loner problem • The missing co-founder • The erosion of good will Our research indicates that, paradoxically, despite what could be perceived as a healthy dose of risk aversion, when it comes to opening up a company to external shareholders, local entrepreneurs have a bias towards keeping it to themselves. This decision could be influenced by various conditions, and may not be simply a matter of preference. Bringing people onboard, whether as co-founders or investors, is clearlya decision in which trust plays an important role. Outlined in the section on Costa Rican Culture, low trust leads to low collaboration; the cultural tendencytowards skepticism and distrust gets in the wayof collaborating with potential co-founders and striking deals with potential partners. The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had givenvague responses to questions.This, of course, results in the investors lacking sufficient information to make investment decisions. More importantly, it stifles the relationship.According to our interviewees, a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful. Several entrepreneurs, on the other hand, explained that the main reason why potential investment meetings go awry is because of investors’ outrageous equity demands (see Scattered angels). As with any new, the social implications they could face in the form of skeptical spouses or family members. When to leave your day job: The dilemma of the part-time entrepreneurship • Seeing if it works before jumping in • Part-time as a bridge • The corporate safety net Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment), several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk. Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities, many members of the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time. An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute. This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments, and by requiring them to incorporate their companies in order to graduate. Faced with the long hours that conflict with their jobs, up to 80% of participants drop out and suspend their startup project. This logic of “see if it works before jumping in” seems to be applied by many entrepreneurs. The problem, as the director of a local incubator pointed out, is that it typically won’t work—unless you jump in with sufficient commitment and dedicate enough hours to make it happen. As a result, many ventures are making “We still have many weekend entrepreneurs, unwilling to leave their daytime job. Fear of failure is a big part of it. People want to jump in once they feel is somewhat sure the startup is going to work” - Juan Carlos Martí, CIE TEC Entrepreneur 50’s20’s AGE + Responsabilites (family) + Financial independence (Savings or credit) + Experience + Contacts + Cost of Opportunity + Support from organizations + Economic Support from family + Energy + Freedom to experiment
  25. 25. 48 49 unregulated market, there are indeed wealthy individuals who have the resources, but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands. In one case reported, in exchange for an early stage investment of $50,000 in a software startup, the investor demanded 70% of the company. Unfortunately, offers like this are not rare among individual investors outside of clubs or accelerators. The short-term consequences, of course, are the lost deals. In the long term, though, the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors. Perhaps because of the combined result of a cultural bias toward low trust, an unregulated angel investment playing field, and bad practices among a few investors, not many entrepreneurs are choosing to share the risk and the equity of their companies. This makes growth organic and slow, and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups. Lack of understanding about private investment • Angel investment 101 • Educating investors • How to approach investors Most participants in the community would agree that there are few known examples of startups that have received private investment, and the low visibility of such examples makes it even harder for newcomers to understand what works, what doesn’t, or even what the basics of venture capital are. While few local resources are available, there are many online references of best practices from other ecosystems, such as the Founder Institute’s Startup Resource Vault and Steve Blank’s Startup Tools. It is the general perception of incubators, accelerators and— particularly—investors, that local entrepreneurs aren’t doing the homework of learning how venture capital works, what a particular investor might expect, and how to value a company in its early stages. Coupled with some investors’ rather limited knowledge of the same topics, it is difficult for both parties to find common ground (see Scattered angels). One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them. While not every investor is comfortable being “schooled” by a young entrepreneur, in cases when the founder has solid credentials or is referred by a trusted source, this approach can considerably increase the chances of reaching an agreement. A final recommendation is that entrepreneurs reach out to the country’s (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital. Carao Ventures, for example, shares best practices on how to approach investors. “Many entrepreneurs are looking for funding, but aren’t yet ready for it. This causes a lot of noise in the ecosystem and makes it more difficult for everyone else, because it lowers entrepreneurs’ credibility in front of investors.” - Eric de la Goublaye, De la Guayaba “When we started to seek funding, the first thing we did when approaching investors was to explain how startups work and how they are valued. In order to do this, we first had to educate ourselves.” - Alejandro Vega, Huli Entrepreneur
  26. 26. 50 51 the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams. While the company’s culture was as expected— extremely positive, since everyone got along—this same feel-good environment had prevented management from confronting employees when performance was low. As one foreign investor observed, the challenge of finding the right team isn’t just a function of the founder’s inclination towards family and friends. After having mentored several entrepreneurs, this investor realized that even when founders recognize the need to fill the gaps in their team, it’s difficult to locate them, as local networks are still forming. “Say you need a good business development guy. Where do you look? LinkedIn?” Large corporations often dominate regular job sites and, although working for a startup is becoming more appealing, a large majority of job seekers are drawn to safe, stable positions with multinationals or the government. One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem, beyond monthly events. Currently, there seems to be little interaction between members of different organizations, which has limited the possibility of both knowledge sharing and service exchange. Creating common spaces for entrepreneurs and freelancers to meet on a regular basis—whether via physical coworking spaces or online platforms—could generate enough scale to facilitate more effective match making. Building networks (or further connecting existing ones) so that people can share ideas, locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem. Again, visibility of one another’s abilities, services and lessons learned, along with best practices, is the key to collective learning and the creation of value for the entire community. The quest for a business model: How to turn an idea into a company • The idea that doesn’t sell • Overlooking the business component of the business • Incubator support as a start • Profitable social ventures Ideas by themselves are of little value. They only become valuable when paired with a way of monetizing them by bringing them to the market. This process is arguably the largest challenge faced by local startups, according to our interviewees. In early stage programs or during the first phases of incubation processes, many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand, competition, production costs and scalability. Once a company is founded, chances are that a co-founder or a team of staff will join the entrepreneur. At this moment, the startup begins to have unique challenges of its own—from securing the required talent to finding its path to its first sales and growth. In this section, we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies. Step one: Building the team • A top reason for startup failure • Two engineers, no business person • The upside of friendship in company culture • The no-accountability trap • Creating shared spaces to meet talent “Building the team” is frequently mentioned as one of the most important steps of starting a company. In fact, it is considered the top reason for startup failure, after a lack of market need and running out of cash. According to many of the interviewed members of the startup community, entrepreneurs often overlook this component. In relationship building, trust is king. As previously discussed (see Low trust leads to low collaboration), however, it seems to be a scarce resource in the local ecosystem. Entrepreneurs usually turn to friends or family when looking for co-founders and employees. This isn’t necessarily unique of the local community, as it is seen in many other examples around the world. What might be distinctive in low-trust societies, though, is the over reliance on this pool as a source for partners and employees. This has many pros and cons that impact the dynamics of the company. The first implication is that the teams are often small—one or two friends; rarely more than three. Second, they usually come from similar knowledge backgrounds, as close relationships often begin in environments such as university or work. Combined, these characteristics often result in unbalanced teams that don’t cover the basics in terms of talent requirements; there might be two technical people and no business person, or two science majors and no one who knows about sales and marketing. As a positively viewed implication, the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together, and the mutual trust facilitates shared responsibilities and splitting the equity. Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months. However, despite this positive atmosphere, teaming up with family and friends can create challenges in terms of the definition of roles and accountability, as the dynamics of personal relationships trump the professional ones. As an example, one interviewee shared The startup. d.FINDINGS “Startup teams are usually three buddies from the same field. Usually they don’t involve people from other disciplines, such as business.” - Claudio Pinto, Fairplay Labs STARTUPS