Mexico City: The 22 Million-Strong Underdog of Mexican Tech

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Why doesn’t Mexico City, Mexico’s giant, sprawling capital, win more tech plaudits? Perhaps because the backstories of manufacturing and manic Jalisco and Tijuana are more captivating for those looking to link Silicon Valley with entrepreneurs south of the border. But also perhaps because, as a 22m-strong city, the largest in the western hemisphere and Spanish-speaking world, Mexico City should, by all accounts, be its nation’s tech powerhouse.

The stats certainly support the latter: Mexico City accounts for around a quarter, or $490.6bn, or Mexico’s entire GDP. Its universities produce 130,000 graduates each year, and the city has been the regional seat of power all the way back to its time as the Aztec capital of Tenochtitlan in 1325, whose temples, razed by Spanish conquistadors, sit right beneath its center.

That has allowed Mexico City, the world’s eleventh largest metropolitan area, to receive a huge amount of government largesse–much of which has been praised by entrepreneurs for its role in bringing a vibrant, eclectic tech scene to the capital.

The state’s Entrepreneur Week has become a staple of the ecosystem, and pairs large multinationals with young, local talent. INADEM, the national institute for entrepreneurs, has its headquarters in Mexico City, from where it currently supports over 20 seed funds. So does Fondo de Fondos, a private equity firm that manages $700m in assets.

This should be unsurprising as the capital of a country Goldman Sachs predicts will be the world’s fifth-largest economy by 2050, and which represents 36.6% of Latin American funding (followed closely by Brazil at 34.4%), according to LAVCA, an analyst. The Mexican state has sought to inject cash all over the nation’s tech scene, distributing $658m in 2014 to around 620,000 entrepreneurs. Six thousand companies, and 73,000 new jobs, have been created as a result.

As the Mexican middle class booms, and structures like internet and banking penetration rise, more and more tech entrepreneurs are going it alone. Manuel Murato, a hacker with Dev.f, Mexico’s first hacker school, is one of them. Five years ago, when he began life in software, there was barely any community–and certainly no hackathon circuit.

Today, there is at least one big hackathon, usually associated with a well known brand, per month,” he adds, noting that big corporates in the ‘CDMX’ (a shortened version of the Spanish Ciudad de Mexico) like BBVA Bancomer, Walmart Mexico, Grupo Modelo and Nestle Mexico are increasingly ready to join “the innovation club”.

Likewise, a spate of high-quality coworking and incubation spaces has emerged in recent years. Coworking giant WeWork now has seven locations in the capital city. Other spaces include Punto Coworking Space, Creatorspace, Centraal, Startup Mexico and URBANSTATION. Startup Weekend, StartupBus, CodeandoMexico and other groups are also bringing tech communities closer together.

They have popped up alongside a cultural and artisanal renaissance in Mexico City. Hip restaurants and bars–especially in the districts of Roma, Condesa and Polanco–have sprung up to cater for middle class urbanites. A new Metrobus system, and an increase in bike lanes, will help ease the city’s chronic traffic (Mexico City still ranks a dismal first on TomTom’s Traffic Index this year, however, with congestion levels reaching 66%). Donald Trump’s election in the US has even seen the beginning of a reverse migration from the US, which locals hope will help fuel the city’s economy yet further.

VC, too, has flourished. There are 45 venture capital funds now registered in Mexico–up from just 14 in 2012. “VC money is now a reality in Mexico compared to the last decade,” says Miguel Ramirez Lombana, CEO at soccer platform juanfutbol (soccer is big business in Mexico: its top tier, the Liga MX, is one of the world’s most spectated domestic tournaments). Guadalajara, the capital of Jalisco, might be closer to become Mexico’s world-class tech hub, he adds, “but Mexico City has this huge advantage of being the heart of the country and center of the economy.”

Many others agree. “Foreign direct investment is much higher in Mexico City than in Guadalajara,” says Pepe Villatoro, CEO of events series FuckUp Inc. “Although IT investment has been higher in the latter, in my opinion it’s important to make a difference between digital and IT. Until a couple of years ago most foreign IT investment in Jalisco was focused on manufacturing and more old-school IT consultancy that didn’t connect to the tech startup ecosystem nor added value to it. The good news is this has been changing rapidly.”

Villatoro’s directly-named creation runs eponymous FuckUp Nights events, where entrepreneurs gather to share sob stories and mistakes. FuckUp Nights has now been replicated in 251 cities across 79 countries. Its Failure Institute, a research arm, helps “decision makers take better informed decisions on businesses, academia and public policies.”

Villatoro’s first forays into tech were in the southern state of Chiapas, Mexico’s poorest region, where the poverty rate is almost 75% (the Distrito Federal, coterminous with Mexico City, is Mexico’s third-least poverty stricken by comparison, with 28.5% of its inhabitants living below the poverty line). When he moved to Mexico City, eight years ago, there was just one major organization supporting growth-stage entrepreneurs, one angel group, and some developers organizing “super happy” dev houses. There was practically no conversation nor knowledge in terms of startups or digital high-growth potential businesses.

Now, he says, everything has changed. There is talent, a digital culture, and many business ideologies Villatoro credits with having come from the US. Mexico’s “pure nature”–i.e. its 70 recognized languages, and difficult relationship with the rule of law– “makes it harder to scale market solutions compared to the US, while in my opinion, making it much more fun, fulfilling and impactful.

“On the other hand, in Mexico City there’s less competition in general, less sophisticated competitors, lower costs, easier access to venture capital for early stages, easier access to decision-makers in corporations and potential big clients, and easier access to most types of talent than big cities of the US; making it a great place to create and position solutions for the whole world, the Spanish speaking world–or for six billion people living in developing economies,” adds Villatoro.

Mexico’s tech metrics are changing fast. A little over a third of the country is now online, a figure expected to rise sharply as the nation modernizes. 44% of the country also now has a bank account. That has helped spurred a flurry of e-commerce and fintech activity. ComparaGuru is among the capital’s leading lights, allowing customers to quickly compare loan products online.

“A few years back basically no institution had an online application for credit cards–let alone APIs and so forth. Now every month a new version pops up from another provider,” says the company’s managing director and CCO Bernardo Prum.

However it is not only startups glomming onto Mexico’s newly tech-savvy consumer base. Most locals are still “not very used to buying online,” says José Antonio Nuño Pérez, CEO and co-founder of online clothes retailer Someone Somewhere. “The ones that do buy online are very used to getting discounts on the big sites like Amazon and Lineo, so it’s hard to convert at regular prices if you don’t have a great brand and digital marketing strategy.”

Nuño Pérez, like every other person contacted for this article, wants to see more success stories–not just to enthuse younger generations of Mexican entrepreneurs, but to convince the paying public that there are great, domestic alternatives to those more famed from Silicon Valley. That is something that must come from all angles, not least the government–which despite its investments comes under considerable criticism.

“Government has been the slower and clumsier of the big important players of our technology ecosystem,” says Murato. “There are some initiatives that in my view haven’t been so bad, such as the Laboratorio para la Ciudad and the Estrategia Digital Nacional, and their relative success has been probably due to the fact that they were able to hire the right sort of people–many of them from the grassroots tech communities.”

“However, other initiatives, such as the INADEM, have been tarnished with political short-term thinking and with the incompetence of their teams, and many times formed with bureaucrats from other parts of the public sector,” he adds. Corruption, red tape and prohibitive regulation are all areas of considerable discontent. Customers must still sign physical paperwork in order to obtain credit cards, for example, and tax laws, and rules governing the foundation of startups, are rarely liberalized to allow entrepreneurs to flourish.

“The problem so far, in my view, has been that the people leading these institutions are more driven by strong political interests than by a genuine desire to bring about positive social impact and change,” says Murato, who wants Mexico City to begin building a “grassroots, cause- and mission-driven and passionate” tech ecosystem, that would rival that of Jalisco’s, where VCs are generally less averse to risk, and where company overheads and costs of living are far lower.

If that happens then there is no reason why Mexico City, its nation’s one true megalopolis, will play the key role in propelling Mexico’s tech industry towards the might of its northern neighbor. The macroeconomic metrics are there. If the government and investors move quicker, Mexico City will become one of the strongest IT hubs in the western hemisphere.

This is Red Herring’s third and final special feature on the Mexican tech ecosystem. Our previous articles examined tech scenes in Jalisco and Tijuana.