How important are early stage companies to ‘Venture Capital’ in Mexico?

In Mexico, many innovative projects with operational, commercial and financial viability have disappeared in the early stages due to lack of financing, since surviving during the first years can be a challenge. The vast majority of those who succumb prematurely are small and medium-sized companies or recently created startups, which despite having growth potential are unable to consolidate their business.

In this scenario, Venture Capital (VC) plays a transcendental role in driving the growth of disruptive businesses; However, in Mexico, accessing these investment funds is not an easy task, especially when it comes to the first business of an entrepreneur.

“Something that investors must consider is that ventures have different financing needs depending on their life stage. The first years are vital both to consolidate the business model and to guarantee its survival. A company that does not get the capital it needs during these years will hardly reach its full potential, especially today where the market still recent the impacts of the COVID-19 pandemic ”, explains Jorge González Gasque, partner of G2, a specialized firm in startups.

According to the most recent Survey on the Economic Impact Generated by COVID-19 in Companies, carried out by the National Institute of Statistics and Geography (INEGI), 96.2% of Mexican companies have not received support during the economic reactivation stage and despite the fact that the majority are optimistic about their future, the persistence of problems such as the decrease in income, low demand and scarcity of inputs continue to threaten the viability of the ventures, particularly those of recent creation.

What is seed capital for?

Investments in the seed or seed stage are the first round of a project and are important since the course of the company depends on it. It is a financing that is destined for innovative projects with growth potential, but which are in the initial stage.

According to data from the Transactional Track Record (TTR) analysis platform, 2020 was not a favorable year for venture capital investments in the country, since during the second quarter of the year they fell 37.53% compared to the previous year. However, in 2021 they have recovered notably and in the first half of the year they grew 88.24% compared to the same period in 2020.

For Israel Cerda, partner of G2, promoting the growth of companies from the early stages guarantees the viability of a disruptive proposal, generates healthy competition and contributes to financial stability. Large companies such as Albo, Kubo Financiero, Cacao, Dapp or Finerio started like this: knocking on doors in seed investment.

To contribute to the birth of more companies like this, G2 Fintech Fund is positioning itself as one of the great seed capital bets in Mexico, since its objective is to invest in 40 companies in Mexico to boost their growth.

These funds are vital during the economic reactivation stage because only through financing can the development of companies and the consolidation of emerging proposals be guaranteed.

What are investors looking for?

Thanks to the appearance of new VC funds with a flexible, empathetic and focused vision on promoting entrepreneurship, obtaining financing has become an accessible task for more companies.

These funds are targeting proposals that are disruptive, that generate traction, that have scalable business models, as well as viable monetization strategies.

Another important factor is that entrepreneurs are clear about the valuation of their company and the direction that their future strategies will take, if not, this could become a point that a great business idea goes astray.

This is reported in the study Failure in technological startups in Mexico , carried out by the Institute of Failure, which warns that the lack of preparation to undertake, the incorrect estimation of the time and effort required, as well as the deficiencies in the strategy have been the three main causes why Mexican startups fail.

Although seed investment is essential, so is comprehensive support, because according to G2 partners, “it is not enough to allocate capital to grow a company, it is also necessary to analyze comprehensive factors that help us understand current needs of each business and find more efficient ways to promote its development in an integral way ”.

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