A brief history of the struggles of Brazilian startups in Mexico
As my taxi made its way through São Paulo’s urban jungle, my mission, clearly stated by Submarino’s big boss, had officially started. ‘Go figure out why our operation in Brazil is so much more successful than yours.’ Despite having launched the Amazon copycat in the two markets within months of each other, we were doing 200+ orders a day in Mexico, while the local operation yielded a couple of thousand daily orders. After almost a year of hacking growth as Mexico’s CMO, I had to figure out why Brasileiros were buying more books, CDs, DVDs and what my marketing counterpart was doing better. It’s like DF with more yellow and blue, I thought as the light turned green.
That year, we were not the only team part of a Brazilian tech company riddled by a challenging Mexican environment. We would not be the last.
Mexico, the second-largest economy and population in Latin America, has attracted tech companies from around the world for the past three decades. Mexicans are heavy users of Facebook, Spotify, Uber, and Netflix. They also commute on Cabify and Movo, operated by the Spanish mobility unicorn, order tacos from Rappi, the Colombian super app, buy stuff online from Argentinian Mercado Libre, pay for flowers on Mexican payment darling, Clip and order avocados, and pastel tres leches on Cornershop, made in San Francisco with Chilean love. All these companies were founded in Spanish speaking countries. Meanwhile and despite huge investments over three decades, no app or service ‘made in Brazil’ is part of Mexican daily lives or any business technology stack. None.
As a new wave of Brazilian startups disembarks, and many investors bet Brazil will win it all, it’s important to look back at the three-decade history of digital adoption in the region to avoid the mistakes of the past. The future for Latin American tech will be brighter if capital is deployed behind the best talent, not the best-funded.
An unequivocal track record
Brazilian travails in Mexico are not exclusive to technology. It’s hard to find any successful Brazilian company in the country. M&A here and there, joint ventures in energy or aviation, but never has a Brazilian company outcompeted locals or other foreign players. And it’s not due to lack of trying: media groups, banks, retail, consumer companies, even PE firms have tried and failed.
Since the late nineties, Brazilian tech has ventured in Mexico in two big waves. During the Internet bubble, companies such as eBay Copycat, Lokau and Internet portal, UOL tried to conquer only to capitulate as the access to capital halted in 2001. Years later, Web 2.0 companies started popping up in Brazil. Rocket Internet set base in Sao Paolo and scaled to Mexico companies like fashion e-commerce Dafiti and taxi-hailing app, Easytaxi. Local heroes like coupon platform Peixe Urbano and e-commerce giant NetShoes invested heavily to win the second-largest market in the region. None succeeded. Amazon, Groupon, Spanish discounter, Privalia, Argentinian travel giant, Despegar and local retailers such as Liverpool prevailed.
Currently, the third-generation of tech companies entering Mexico must avoid the same recipe as the first two: raise huge rounds, declare victory before serving the first customer, hire a Mexican team who can drink the yellow Kool-Aid and translate everything to Spanish.
Lost in translation
Ask almost any young Brazilian if they speak Spanish, they’ll probably say they can’t speak but understand. That may be the first miscalculation. Our languages and cultures may seem similar, our countries face almost identical problems and impose similar non-market complexities for doing business. Despite our comparable journeys, Mexico City has more in common with Madrid and Los Angeles than Rio.
Some of these expansion efforts fail because it’s hard to find and retain the right team. Most hire locals and export senior managers in search of the right mix. ‘First, they try to hire a Mexican leader. When execution gets hard and it always does, they send a trusted Brazilian executive or start micromanaging. This, in turn, makes things worst. After a couple of years, they just give up. Finding the right team is both the hardest and most important aspect of expanding here.’ Murillo Tavares, former Brazilian CEO of Submarino turned headhunter and angel investor based in Mexico.
Adapting to the local market is more difficult than expected. Mexican consumer and business clients adopt technology at a different, often slower pace than Brazilians. Therefore, it takes longer to find product-market fit. A company can start growing fast to suddenly find a ceiling and stop. To grow again, adjustments are needed. It’s puzzling. That’s the reason why any tech company with scale in Mexico has natural barriers to entry. Until the past few years, execution in tech was grueling even for local entrepreneurs. A quick translation of a proven and sophisticated product appears to be enough. It never is.
Over the years, a series of miscalculations have led tech Brazilian companies to overinvest too early and underinvest in the long run. They have been willing to invest enough capital but not enough time.
What’s next for Latin American tech
In order to justify the high valuation, some big Brazilian tech companies have included Mexico on their roadmap. Winning Mexico and Brazil is the equivalent of winning your league and the Champions the same year. Argentina is too unpredictable and the rest of Latam, too small. Ever since mega-rounds are accessible in the region, more and more startups have announced their intention to launch in Mexico.
Given the overwhelming evidence, founders and board of directors should view the Mexican expansion as Mexicans see the Brazilian opportunity: a risky and expensive endeavor. I’m not saying you shouldn’t expand to Mexico or support portfolio companies in their Mexican ambitions. I submit it will require that most companies find a new team-market fit and a new product-market fit.
Since greenfield projects have proven so hard, buying talent or product may be a good option. Sergio Romo and Jonathan Lewy, founders of the dominant micro-mobility company in the region may have found the right game plan when they merged their Mexican startup with their Brazilian competitor to create a bi-cultural and bi-national company. To strengthen their go-to-market, they partnered with Rappi which had already millions of customers in major cities of Brazil
If adding the Mexican market makes sense, Brazilian companies should add a strategic partner with long experience and strong local networks in both markets. Start small and be ready to pivot the team structure, beachhead market or value proposition. Sufficient tech and financial resources should be committed in a multi-year plan. Most importantly, be ready to fail at first and maybe for a few years before finding the right recipe to win. Don’t build hype.
Yes, I’m clearly biased. I want my investments in teams from Chile, Colombia, Argentina, and Mexico to dominate the region, including, of course, Brazil. If every international investor believes they won’t, it makes our jobs harder and lowers the odds. As for founders working hard from Mexico and Spanish-speaking countries, they should keep pushing and don’t pay too much attention to competition, real or whimsical. History is on the side for those who grew up watching El Chavo del Ocho, the iconic 70’s comedy show watched to this day by Mexicans and Spanish speakers all over the world.
That summer of 1999, my mission was unsuccessful. Of course, the marketing team in São Paulo was awesome but they were essentially running the same banners, mailings, and promotions. No secret sauce or unique consumer insights. If anything, my team tried harder, tested more things and shipped campaigns faster.
Their bottom of the funnel converted clients so much better, we needed four times more traffic to yield similar volume. That’s about all I learned in São Paulo. Without a breakthrough, we kept at it for a couple of years, until the Internet VC collapse changed our plans. Despite Submarino’s hot status and $70M war chest, it wasn’t spared by the crisis.
‘After trying everything, I’m forced to fire all the management team to move forward with the merger. It’s nobody’s fault, perhaps it was too soon for Mexico.’ Said, my boss, a seasoned Mexican entrepreneur. I ended up working for free a few months to help with the integration with EsMas, Mexican largest Media company’s Internet arm, awaiting the start of my MBA. Following the closure or sale of every international operation, Submarino had a successful initial public offering in 2005.
I realize now, no one from the Brazilian marketing team ever visited. Priorities were clear.