Reflecting on our experiential learning from Buenos Aires
Since this blog post does not intend to convey a horror story, let me spare you the suspense: Argentina is an extraordinary successful country. Over the last six decades it has decided consistently to underdeveloped itself and not only succeeded, but exceeded all expectations! One of the richest countries of the world a century ago and the Latin American leader after the second world war, it has become tired, its middle class eroding, isolated from the global geopolitical scene and surrounded by an infamous short list of friends such as Cuba, Venezuela, and Iran among others. Its enormous natural resources and human capital are squandered in a constant contradiction of its huge potential vs. its sad reality.
Against this backdrop we started our visit to the innovation and entrepreneurial ecosystem (and the global services industry) in the beautiful city of Buenos Aires, where its citizens (the porteños) are finally giving in to the thought and recognize that they are part of the Latin American mosaic and NOT Europeans as they have considered themselves for the prior hundred years.
The government of the Kirchner dynasty, now Cristina the widow of former president Nestor Kirchner, has touched unrepentant two neuralgic points of the Argentines: inflation and the freedom to own dollars. Both are indicators of the national well being used as a thermometer by most if not all the argentines. They have learned through periods of hyper-inflation that once it approaches to 1% per month it reaches the instability point and the almost certain risk of acceleration out of control. Today running between 2 to 3% a month is obviously noted in the cost of the everyday consumption of its citizens (for the cost of a “ cortado” or a doppio macchiato wet as the Starbucks have relabeled). Unfortunately the national institute of statistics (INDEC) has just reported the official inflation rate for 2012 at 10.8% while most think tanks in the financial sector report the inflation for the same period at 25.6% (and expected to reach over 35% in 2013)
The freedom to purchase at will dollars is a right exercised by a minority of the Argentine citizens, but an indicator used again by most. The average citizen knows the exchange rate, in the face of exchange restriction, create an informal (illegal) market, however the value of the “dollar blue” as the sophisticated argentines call it, is freely reported by the media. This morning newspaper reports “blue” green-bucks with a spread of over 50% above the government controlled official rate (US$1 = 5 Arg pesos), creating a distortion of prices, costs, foreign products availability, import substitutions, etc.
This fiction creates a backdrop for our visit to Buenos Aires as an enigmatic and mysterious soap opera of epic proportions indeed!
How does this affect the entrepreneurial ecosystem? I would say surprisingly very well. I would say that today in Argentina “To be an entrepreneur is the best revenge…” the internet connected to a laptop (or any other mobile device) has flattened the world and democratized access to global markets. As long as the products and services run through the wire there are no customs, no duties, no movement of atoms and its success is only limited by the creativity and innovative capacity of the local entrepreneurs. Against all odds, a few risk capital firms (including ALAYA, the fund I am part of) are providing the growth capital for these entrepreneurs to fund their young ventures. While kind of absurd for Silicon Valley standards, we have been able to identify three compelling reasons to invest today in Argentinean start-ups:
- Compelling start-ups reducing the great local market frictions and empowering the consumer provide excellent value propositions. Some are copycats adapted to the local conditions, other are unique innovations. Both run over the wire with fast opportunity to scale over other Latin economies, in particular Brazil, Peru, Colombia and Chile. As we experienced in Lima and Santiago, scaling up globally using as the launching pad Silicon Valley is the big dream of most Argentine entrepreneurs.
- Excellent human capital has been one of the key assets of Argentina. In spite of its decline, access to education is widely available and although its quality is uneven, still there are pockets of excellence. Hence, an Argentine youth unable to emigrate has two choices to find a job with mediocre pay or take the chance and become an entrepreneur. A skill sharpened and almost required to survive the complexity and uncertainty of the daily life in Argentina.
- Attractive valuations due to Argentina’s financially isolation from the rest of the world. Since the 2002 default, Argentina has been unable to leave behind this issue due to the bond-holders that did not accept the default conditions imposed unilaterally by Argentinean government after the economic implosion of 2001-02. Furthermore, the country risk is larger than most developing countries; it has reduced the FDI to almost zero.
Buenos Aires remains a beautiful city, its citizens are sharp, well prepared and able to think globally. They do not suffer any inferiority complex when confronted with the dramatic challenges their country faces…. They have seen worse and their creativity and entrepreneurship gives them the confidence that they will survive again any future economic/political implosion. In the meantime, the future remains uncertain.
My dear readers, you should decide if it is time to cry or not for Argentina. May be not yet, but let’s wait until their citizens return from the summer holidays, for now many are enjoyng Punta del Este.
Until my next posting from Montevideo and the synthesis of the journey with my MBA students – Carlos B.