Crowdfunding Consolidates as a Source of Investment for Startups in Mexico

Foreign institutional investment has been significantly reduced for technology startups in Mexico, due to the macroeconomic context, which has been characterized by maintaining high reference rates. This has made it more difficult to obtain said capital to boost the growth of the platforms in Mexico.

However, in collective funding, there is still interest in providing resources to technology companies , according to Luis X. Barrios, executive director of the Collective Funding Institution (IFC) Arkangeles.

“Crowdfunding is becoming more important because we can be the venture capital fund for these startups and by taking advantage of the technology and the crowdfunding license we can encourage more investors in the region to invest in these types of companies,” he said.

In this scenario, venture capital funds, one of the alternatives for technology companies to attract investment, have concentrated their resources on recently created companies. The Latin American Association of Venture Capital & Private Equity in its latest report ‘LAVCA: VC Trends in Latin America’ pointed out that many startups only raise funds in early stages and do not obtain financing for later phases.

Since 2019, more than 1,700 companies in Latin America have obtained early-stage financing from venture capital funds, but without raising the next round of investment, according to the study.

“There are many companies in different later stages, which are facing a scenario with less supply, greater scarcity, although many funds still have capital reserves to continue, various portfolios have taken demanding measures and conditions such as companies being closer to profitability,” said Barrios.

Although in Mexico, crowdfunding was seen as the last alternative for these companies, Barrios explained that in the recent context, obtaining capital in this way has become a way to validate their business models, adjust their value propositions and increase the chances of raising investment in future rounds.

According to internal figures, Arkangeles has facilitated investment to more than 100 companies in Mexico, and serves 15,000 investors.

Market maturity in Mexico

The Law to Regulate Financial Technology Institutions enacted in 2018, also known as the Fintech Law, regulates crowdfunding activities specialized in collective financing of debt, equity, co-ownership or royalties.

In this scenario, Barrios highlighted that the regulation and the time that the segment has been developing in Mexico have allowed collective funding to reach a state of maturity, however, challenges persist.

“In the United States, Europe and Asia there is a much more solid crowdfunding ecosystem and on the other hand, you have a community of investors, a population that is a bit more sophisticated, they have been investing in this type of assets for more years, there is more culture in the subject of portfolio diversification,” he highlighted.

The executive indicated that in Mexico, the challenge persists for investors to change and opt for more alternatives to traditional financial institutions.

“Today’s competition is more of the same, they are fighting for the same cake, by trying to improve their service, that is not what the user really needs, what they are looking for is to have better and new products,” he said.

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(Featured image Filip Gielda via Unsplash)

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First published in EL ECONOMISTA. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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