Monday
July 30
2018

Kevin Garrahan

Enough With the Old Unicorns: Why Argentina’s Tech Sector Needs to Look to the Future to Create Social Impact

Every article about Argentina’s tech sector inevitably mentions the country’s “unicorns.” These firms – MercadoLibre, Despegar, Globant and OLX – were largely founded in the first tech wave of the late 1990’s and early 2000’s. MercadoLibre is the largest, and is one of the world’s top e-commerce firms, Despegar is a leading travel site, Globant is a software development firm serving top-tier clients around the world, and OLX is a Craigslist-esque marketplace in the region.

These companies speak to the country’s successes and potential, and they and their founding entrepreneurs are still important within the sector. But it’s 2018 and we’re still bringing them up. Tecnolatinas, a 2017 report supported by the Inter-American Development Bank and regional venture capital fund NXTP Labs, indicates that Argentina is still the second largest tech market in Latin America, coming in behind its massive neighbor, Brazil. This is largely due to the four unicorns, but following these larger companies, the gaps become more apparent. Argentina has a few more recently founded mid-size companies, such as game developer Etermax, but Brazil dominates across all valuation segments – and Mexico and Colombia are gaining ground in the $25-500 million space as well.

It’s apparent that the sector is mostly resting on its track record, rather than living up to its potential. Instead of harping on these past successes, we should be talking about the persistent barriers to further growth in Argentina’s tech sector. Why haven’t there been any more unicorns, for instance, and how can we expand the sector’s impact across the broader economy?

 

The Social Value of a Thriving Tech Sector

This lack of recent momentum means Argentina is at least partially missing out on a key economic driver – at a time when it desperately needs to find new ones outside of low-value commodities. Tech firms support high-quality, 21st century jobs that suit Argentina’s – and especially Buenos Aires’ – educated workforce. The ecosystem – both the companies themselves and other supporting organizations – needs to expand to create a well-functioning, self-reinforcing loop of more high-paying jobs and greater skills development. What’s more, as the Tecnolatinas report explains, technology is increasingly being used to tackle the greater challenges facing society in food, energy, education and access to financial services, for example. In Latin America, Brazil and others are leading the charge in this regard: Many Argentine tech firms support jobs, to be sure, but they generally don’t focus on these broader social goals. In short, Argentina needs to push its tech sector beyond its past successes in order to advance social impact.

The City of Buenos Aires has been working for some time to address these issues. Starting in 2008, under then-Mayor (and current Argentine president) Mauricio Macri, the city began focusing on entrepreneurship and innovation in its economic development policies. Since then, accelerator and incubator services that the city helped to fund have supported some 30,000 entrepreneurs, which have created an additional 10,000 jobs, according to the city’s tourism department. And this year, the city launched a new program, incuBAte, which has been getting a lot of good press. It’s a competitive incubator that includes equity-free funding of $10,000, mentorship and co-working office space for some 100 startups per cohort.

IncuBAte, which kicked off a 30-entrepreneur pilot program this spring, is another step in the right direction. Organizations like the Kauffman Foundation and impacting investing firm Village Capital have examined similar programs and found that they can be a valuable catalyst for a city’s entrepreneurial ecosystem. The startups coming out of incuBAte should also benefit from the investor-friendly climate Mr. Macri has fostered during his time as president. The famed Silicon Valley venture capital fund 500 Startups, for example, has started investing in tech firms from the city.

 

A Challenging Outlook

Unfortunately, Buenos Aires’ efforts may not be enough to counter the larger headwinds the Argentine tech sector is up against. The country needs to add millions of formal jobs, according to the Minister of Production, and small-scale incubators just aren’t up to the task. What’s more, as the startups grow, they face the same tax and labor constraints as other sectors in the country. The Entrepreneur’s Law of 2017 addressed some of the low-hanging fruit, making it simpler to register a business, for instance, and providing direct government funds and tax incentives for startup financing. Now, firms need and want bigger policy changes that are going to be much harder to pass through the legislature. Excess labor costs from payroll taxes, especially, force tech firms of all sizes to look elsewhere for less-expensive talent. For the ones that successfully expand across the Latin American region and world, this means their impact on employment and ecosystem growth back home is minimized. For those that don’t, it makes growing their business that much more difficult.

With the prospects for payroll tax changes fairly low, especially as the Macri government struggles with broader economic challenges, both Buenos Aires and the rest of the country have to think outside of the box. Are there other incentives they can offer small- and medium-sized tech firms to get them to hire and expand locally? Could they afford to offset some of these high labor costs, for instance? Any such policies would have to be mindful of creating distortions that unintentionally discourage firm expansion and hiring, of course; they could, perhaps, be temporary or contingent on employment metrics to address those issues.

Local and national governments could also work with partners to expand ecosystem support – in talent sourcing, global connectivity, funding, applied research and other resources – for businesses that have moved beyond the early growth stage, helping to lift more Argentine firms into the next valuation rungs. Regardless of the exact structure, it’s clear that new policies are needed if Argentina is serious about making tech a driving force in its economy and society. It’s the only way to go from a collection of small startups supporting thousands to the next wave of Argentine unicorns employing millions.

 

Kevin Garrahan is a recent graduate of the Johns Hopkins School of Advanced International Studies (SAIS).

Photo by Maximiliano Buono. Homepage photo via MaxPixel.

 


 

 

Categories
Entrepreneurship, Technology
Tags
accelerators, business development, emerging markets, entrepreneurship, jobs, Latin America, public policy, startups, technology