Shared DNA, Different Destinations. Start-Ups Introduction

Pymes

Shared DNA, different destinations. Start-ups Introduction

A rose by any other name would smell as sweet,” Guillermo Ortega Rance and Noha Ki- says Juliet in the romantic balcony scene where khia reached an overarching conclusion Executive Editor she asks Romeo to forsake his name out of love for that Mexican public policy on innovation her and the prospect of having her forever. in 2018 - 2024 needs to balance creating Rossana Fuentes Berain Villenave What name will we have to forsake in Mexico to the space needed for a nascent startup refer to an entity dedicated to business, an entity that does its ecosystem while also attending to a lack Authors work with a limited number of employees, that already has sales, of productivity in small business. aspires to grow and may or may not be rooted in technology? Doing this from two branches of pow- We know that not only Shakespeare but also the Argentine er, executive and legislative, in Mexico and Guillermo Ortega Rancé poet Jorge Luis Borges said that naming makes a thing real. two spaces within the US government, the Noha Kikhia It opens and closes possibilities because the way in which we Department of State and Small Business describe the world affects how it manifests. So rather than Administration, is taking agency over the Collaborators switching from one concept to another or just abandoning one spirit of Chapter 25 from the new trilateral all together, we wanted to see what was implied in two terms: trade agreement USMCA. One of the prem- Mayra Álvarez Graphic Design startups and small and medium sized businesses in Mexico and ises of the new agreement was to expand Addy Góngora Basterra Editor the United States. the benefits of international trade to a larg- Conversations about innovation frequently use both terms er number of companies, and not only the and therefore the concepts are quite relevant. Shall we use the usual suspects for SMEs, but also those Thank you to the following for sharing your thoughts with us: English word that immediately references Silicon Valley, the owned by minority groups and women in home of technological startups for the global economy? Or giv- Mexico, the United States, and Canada. Abel Bezares - VARIV Capital / Startup Ecosystem en the current political times shall we forsake the Shakespeare In Mexico, understanding startups and Alejandro Ortega Amaya - Integra Solution TI / SME in Mexico language and go for castellano, PYMEs, that puts more of an small businesses better will allow the eco- Alexandre Berthaud - Akiba / Startup emphasis on the internal market? system to grow and fill with not simply Antonio Aguilar Solís - Centro de Competitividad de México (CCMX) / SME Ecosystem Are SMEs and startups different entities belonging to two dif- more incumbents, but others who want Joan Segura Oyamburu - Play Business / Startup ferent Mexicos? One that is globalized or another that is inward to be a part of a movement. However, re- Pascal Finette - Singularity University / Startup Ecosystem looking? Or can the words move between those two universes gardless of the name adopted, we all want regardless of their specificity? something similar from the capitalism of The following exploration is meant to provoke precisely that - the hemisphere: to generate first-rate jobs. a dialogue around the two concepts in the purest sense of what the Mexico Institute at the Wilson Center always promotes: – Rossana Fuentes Berain Villenave • The generation of a body of knowledge, this time around start- CEO and Co-Founder México Media Lab ups and small businesses in Mexico • Documenting what can be of value within the same concepts in the USA to use as comparative politics • Promote ideas for bilateral cooperation on the topic Contents

Executive Summary

1. Definitions of Small Businesses & Startups______9 What is formally a Small Business? What is formally a startup? What are the differences between small businesses and startups?

2. Mexico, the public policy pendulum for small businesses ______19 Ecosystem and public policy Needs Challenges

3. Estados Unidos, manteniendo el liderazgo innovador ____25 Ecosystem and public policy Needs Challenges

4. Bilateral agenda ______31 Talento International trade Innovation

What are we doing in Lab4? ______33

5 Small Businesses & Start-ups

Executive Summary

tartups and small businesses in Mexico and the United es share a need with large corporations States are integral to the growth of each economy. The in incorporating innovation and technol- purpose of this document is to explore formal and infor- ogy in their operations to be competitive mal definitions of both types of organizations, study their in their industries. Startups do not share Scontexts and needs on each side of the border, and how each this need because they typically are using government can design effective ecosystems and public policy. technology in their novel business mod- The primary difference between small businesses and start- el to disrupt the market, a threat to both ups is that to be classified as small there are formal guidelines small businesses and large corporations. whereas the definition of a startup is much more fluid. In both In the United States, public policy has Mexico and the United States small business criteria is based on long focused on giving support to small number of employees, annual sales and the industry - the only businesses while the private sector took difference lies in the exact formulas. A startup on the other hand the lead on cultivating startup ecosystems. does not have objective characteristics and the informal defini- In Mexico the public sector has been cru- tion relies on its level of growth and relationship to innovation cial for both groups. The difference in gov- and technology. Through interviews and formal research we have ernment engagement has created an op- identified three primary characteristics that distinguish a startup portunity for both countries to co-design from a small business: a bilateral agenda that takes into account the strengths and challenges of startups 1. Objective to grow: startups are born with the ambition to and small businesses in each country. We grow to reach many users and customers recommend the bilateral agenda focus on 2. Speed of growth: startups are able to scale exponentially, the following issue areas: growing their income with relatively small teams 3. Novelty in the business model: startups are generally orient- ● Talent: create a regional vision for the ed toward resolving an unmet need in the market workforce and train people with tools that connect supply and demand of tal- These three characteristics are crucial to understand. It ent on both sides of the border demonstrates that support services and public policy that targets ● International Trade: take advantage of these two groups are interconnected but require slightly different the USMCA to move away from focusing approaches to reach ideal outcomes. Startups are experimental solely on volume of trade between the and contribute innovation, new skills and added value to their in- countries to actually integrating regional dustries and the economy. Small businesses are integral to eco- value chains to make North America a nomic growth and job creation. While both types of organizations more competitive region globally appear similar based on size, the needs of small businesses are ● Innovation: increase the level of glob- a combination of the needs of startups and large corporations. al connectedness of the innovation and Much like startups, small businesses often compete with entrepreneurship ecosystems in each large companies that have access to more resources which cre- country to positively impact the growth ates common needs across the two groups: access to financing, and competitiveness of small business- talent and new clients. However, unlike startups small businesses and startups

7 Small Businesses & Start-ups

Definitions of Small Businesses 1 and Startups

8 9 Small Businesses & Start-ups

ow many times have we used a The law and formal language allows us Stratification of small businesses in Mexico word and realized too late that to give uniform and pragmatic definitions Law for the Development of the Competitiveness of Micro, Small and Medium Enterprises it means something different to to the concept of business/empresa that us than those with which we are also allows comparability between the Hcommunicating? two languages and contexts. However, In the areas of business, economics, informal definitions created through - dif Micro Small Medium and technology there are various words fering cultural lenses also influences how that refer to abstract concepts that are es- we interpret business concepts. In the Sector All Comercial Industrial and Commercial Services Industrial pecially susceptible to differing interpreta- rest of this paper we 1) elaborate on the Services tions. In Mexico it is common to hear con- formal definitions of small businesses and versations where people see startups as startups in Mexico and the United States, small businesses as well as others claim- 2) identify differences based on conver- Number of Up to 10 10 to 30 31 to 100 31 to 100 31 to 100 51 to 100 ing they are quite different. Some strongly sations with different actors of the entre- Employees defend themselves as “serious” business preneurial ecosystems of both countries, professionals, not entrepreneurs; others and 3) propose focus areas for a bilateral presume their companies are startups, not agenda. Annual sales small businesses. (millions of Up to $4 $4.01 to $4.01 to $100.01 to $100.01 to $100.01 to These gaps in understanding are What is formally a small business? MXN pesos) $100 $100 $250 $250 $250 deepened when we translate from one language to another. Each word used has Small and medium sized enterprises its own cultural evolution. For example, (SMEs) are considered the backbone of when we refer to the concept of engag- many economies, especially in Mexico and Maximum 4.6 93 95 235 235 250 Combined* ing in economic activity to earn a profit, in the United States. These organizations are Spanish the word “empresa” (enterprise) key for increasing productivity, job creation is used and puts more emphasis on the and inclusive economic growth. That being institution whereas in English the word said, SMEs are defined slightly differently * Maximum Combined = (Employees) x 10% + (Annual sales) x 90% “business” is used and focuses more on on each side of the border. the activity. In Mexico, the formal definition of This seems to have a cultural impact SMEs comes from the Law for the Devel- that is relevant to the conversation at the opment of the Competitiveness of Micro, heart of this paper. Anyone who engag- Small and Medium Enterprises. In effect es in economic activity to survive in the since 2002, Article 3 defines micro, small In Mexico there is no legal structure ent classifications. The SBA was created United States is linguistically considered and medium sized enterprises as legally that allows someone to open a business in 1953 with a focus on delivering loans, a business owner, but in Mexico an em- constituted companies that have 0 to 100 as a sole proprietor; commercial compa- loan guarantees, contracts, counseling, presario is someone who already has an employees if they are commercial or 0 to nies must have at least two partners. In and other forms of assistance. To qualify established institution. Thus, those who 250 employees if they are industrial. It is practice, many micro-entrepreneurs start for the support and services of the SBA, do not meet that requirement in Mexico estimated that there are about 5 million their businesses individually and oper- companies must qualify according to the are referred to differently with words like companies in Mexico of which 99.8% are ate as the “physical or moral person with Small Business Size Standards which vary changarro or trabajador autónomo. small or medium-sized. commercial activities” defined under Mex- by industry and are either based on num- In 2009 an agreement was published ican tax laws, specifically in the Income ber of employees or annual receipts. in the Official Journal of the Federation Tax Law. The last update to the Small Business Small and medium-sized companies that introduced a new formula to reclas- The classification of small and - medi Size Standards was in October 2017 and are considered the backbone sify SMEs into categories based on the um sized enterprises in Mexico is most the industries match those in the North number of employees and annual sales similar to the SME definition used in the American Industry Classification System of many economies, which is a in millions of pesos1. This was proposed European Union. However, the entity in (NAICS)2. About half of all specific industries reality in both Mexico and the with the goal to increase the reach of pro- charge of the formal classification of small use number of employees to classify small United States. grams for SMEs to serve not only compa- businesses and support services in the businesses and the other half uses annual nies with small teams, but also those with United States is the Small Business Ad- receipts. The sectors, groupings of specific less income. ministration (SBA) and they have differ- industries, that use each are as follows:

1. http://dof.gob.mx/nota_detalle_popup.php?codigo=5096849 2. https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf 10 11 Small Businesses & Start-ups

A comparison of these organizations Small business across the United States and Mexico in Mexico demonstrates the diversity of the companies is quite large, however many of the According to the 2018 Small Business needs are similar which suggests thought- Profile, there were 30.8 million small busi- An SME in Mexico is ful ecosystem building and public policy nesses in the United States that made up any legally constituted can effectively support these companies. 99.9% of all companies and employed company that has a certain SBA clasification criteria 58.9 million people - 47.5% of the pri- number of employees What is formally a startup? Small Business Administration Estados Unidos vate workforce in the country3. While the and annual sales, with classification of small business does not special tax provisions for The fact that an English word is used in Accommodation and Food Service always depend on number of employees, micro-entrepreneurs who Mexico gives a clue that startups are an Administrative and Support, Waste the data shows firms with fewer than 100 perform business activities imported concept. From where? Clearly employees have the largest share of small from the entrepreneurial culture of Silicon Management and Remediation Services but do not have a formally business employment and firms with few- Valley that gave rise to startups that have Agriculture, Forestry, Fishing and Hunting incorporated institution. er than 20 employees experienced the become icons of the 21st Century. Arts, Entertainment and Recreation largest gains in 2015 - adding 1.1 million In the United States there is a robust Construction net jobs. startup ecosystem that surrounds an en- Educational Services The large diversity among small busi- trepreneur such as accelerators, incuba- Finance and Insurance nesses in the United States poses a chal- Small business tors, private capital, academic programs, Health Care and Social Assistance lenge in creating a support ecosystem in USA research institutes and more. The term

DOLLARS Management of Companies and Enterprises and crafting comprehensive public policy “startup” was born during the dot com Other Services to advocate for the needs of these organi- boom in the early 2000s when compa- Professional, Scientific and Technical Services zations. The SME definition is not formally A small business in nies experienced highly scalable business Real Estate and Rental and Leasing used in the United States to distinguish the United States is an models and eventually turned a prof- Retail Trade organizations that may have different independent company it by using the Internet. There is no sin- needs based on their size. There is a sin- that fulfills the SBA size gle, agreed-upon definition of a startup, gle definition of small in the USA- com standards based on number but there are many key players in the US pared to micro, small and medium-sized of employees or annual startup ecosystem who have attempted to Manufacturing in the Mexico and the EU. The User Guide receipts. define the characteristics of a startup that Mining, Quarrying, and Oil and Gas to the SME Definition published by the EU distinguishes it from other types of orga- Extraction claims that not only size, but also resourc- nizations. Utilities es are important to consider when clas- The federal government in the United Wholesale Trade sifying SMEs. If an entity does not have States is not a central player in the startup

EMPLOYEES many employees but is owned by a larger ecosystem and therefore the definition of entity or has access to resources through There are clear distinctions between a startup is more likely to come from other partnerships and linkages, they may not PyMEs in Mexico and small businesses sources in the ecosystem. One organiza- qualify as an SME4. This system of clas- in the United States when considering tion central to entrepreneurship in the US Information sifying organizations is one approach to the formal definitions. PyMEs are classi- is Y Combinator, an accelerator started in

MIX Transportation and Warehousing administering services more efficiently, fied in three categories (micro, small, and 2005 that helped to launch startups like which the SBA solves for by the creation medium) whereas small businesses are Dropbox, Airbnb, and Reddit. One of the of small business development centers simply in a single category. The cutoffs founders of Y Combinator, Paul Graham, (SBDCs). There are over 900 SBDC ser- of number of employees and revenue are defines a startup as “a company- de vice sites around the country that modify distinct. Small business classifications in signed to grow fast6. Startups must make their services to meet the evolving needs the United States are industry dependent, something many people want and create of the small businesses in their area5. and there are 427 industries in the Unit- a way to reach and serve all those people. While the classification of small business ed States which the employee cutoff to Another definition of what distinguishes a in the United States has a single category, qualify as small is higher than the 250 em- startup has come from Eric Ries, author personalization is achievable through ser- ployee cutoff to qualify as medium-sized of the commonly used methodology Lean vices offered on a local scale. in Mexico. Startup.

3. https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf 12 13 4. http://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition_en Small Businesses & Start-ups

A note about technology

The use of technology is a commonly cited characteristic in the conversation about the differences between a startup and The startup It was usually associated with the small a small business, but there seems concept was business owner who, by vocation, started to be a debate about whether or a business to solve a market need and not it is a true differentiator. Some generated in dedicated his whole life to growing the say that the use of technology Silicon Valley with business as much as he could. Many of distinguishes startups because the large Mexican companies today have it is what allows them to reach an entrepreneurial story behind them. highly scalable the level of exponential growth. The Global Entrepreneurship Monitor Others argue that there are Internet-based (GEM) has measured global entrepreneur- innovative startups that grow companies. ial activity for almost two decades with a methodology that identifies the percent- exponentially with a novel age of the adult population that is working business model without technology in brand new companies and companies at the core of what they do. that have been in operation for less than 3.5 years. In Mexico that percentage, According to researchers at called Total early-stage Entrepreneurial the Startup Genome Project, Activity (TEA), doubled from 10.5 percent industries that are experiencing in 2010 to 21 percent in 2015, then later the most growth are Advanced 9 fell to 14 percent in 2017 . Manufacturing and Robotics, In the last decade, the traditional con- AgTech, blockchain, and Artificial cept of the entrepreneur has become more Intelligence, Big Data and associated with the newer concept of the He says, “A startup is a human institu- 1. Existing market: there are users, com- startup, popularized by the technology analytics. While all these areas are tion designed to deliver a new product or petitors and a channel. customer discov- companies in California. In certain circles, experiencing tremendous growth service under conditions of extreme un- ery is easy both words are used equally to talk about with the use of technology, it is certainty.” He emphasizes this definition 2. Resegmented market: (low cost or this new model of high-impact, fast-grow- not the whole picture. Brookings has nothing to do with size, age, or indus- niche): existing market with an incumbent ing companies. Institution studied the companies try - but rather is tied to the pursuit of insti- so a startup strategy needs to be low cost There is not standard definition of a listed in the Inc 5000 which tution building in the face of uncertainty7. or exploit a niche startup in the law; since a startup is an are companies experiencing One final definition posed by Steve 3. New market: new users, competitors early-stage company it often shares char- the most growth over a certain Blank, a Silicon Valley entrepreneur and and channels which makes customer dis- acteristics with small businesses and is sales threshold. They found that now professor of entrepreneurship, is: covery more challenging subject to similar laws. Eduardo Morelos 29 percent of rapidly growing “A startup is an organizations formed 4. Clone market: Startup outside the US of Startupbootcamp Mexico describes companies were in high tech while to search for a repeatable and scalable cloning an existing US business model these differences by defining a startup as more than 70 percent were in business model.8” Much like Eric Ries, “a large company in its early stage,” add- he emphasizes the experimental nature The existence of the fourth type of mar- ing that “different than an SME, a startup other industries. This study makes of startups and the novelty of their ap- ket - clone market - is a testament to how is a business that can scale more quickly an important observation, “though proach. Startups can exist in four types this startup culture has taken off all over the and easily, using digital technologies.10” high-tech firms are much more of markets: world, including México where the concept Through conversations with entrepreneurs likely to be high-growth, not all of an entrepreneur already existed. who define their companies as small and high-growth firms are high-tech. others who call their companies startups In fact, the substantial majority we have identified some differences in the are not.” There is more consensus concepts. around the idea that startups must

5. https://www.sba.gov/offices/headquarters/osbdc/resources/11409 experience exponential growth

6. http://www.paulgraham.com/growth.html rather than having a base in technology. 14 7. https://www.inc.com/eric-ries/eric-ries-how-to-define-a-start-up.html 15 Small Businesses & Start-ups

Shared challenges between small businesses and startups

What are the differences between a Characteristics Small Businesses Startups small business and startup? Seek angel investors and The formal definitions explored thus far seed capital to finance suggest that all startups are SMEs - in Typically seek credit the work necessary to get Mexico - or small businesses - in the Unit- Capital and loans to finance from an idea to reality. ed States - at an early stage in their life- inventory, working Venture capital is the tool cycle. But what differences are there be- capital and their teams. frequently used to sustain tween a startup and a small business in its their accelerated level of early stages? growth. From conversations with actors in sup- Startups are port ecosystems of startups and small Develop soft skills in Recruit the best talent businesses in both countries, we have their employees that with experience in their identified three elements that distinguish allow their small teams distinguished by a product or service. a startup from other companies in their Talent to be resilient and Typically search for early stages: search for technical novel business model people who thrive in skills to operate new fast environments of ● Objective to grow: startups are born tools that continuously aimed at growing uncertainty. with the ambition to grow to the scale evolve. of large companies like the legends very, very fast. that gave rise to the term (Google, Am- azon, Apple, Facebook, Microsoft) or grow enough to lead to a successful One of the biggest challenges for startups; exit Are well positioned in they usually have ● Speed of growth: startups are able to situations where they innovative products and scale exponentially, growing their in- generate demand services that require them come with relatively small teams Access to market among clients. Give to educate their customer ● Novelty in the business model: start- confidence to clients and convince them to ups are generally oriented toward re- through certifications try it out. This requires solving an unmet need in the market. and good practices. translation into a familiar While it is clear startups and small language and gaining businesses have distinct characteristics, their trust. they do share similar challenges that must be confronted with different strategies: Adopt new tools to Generate technological improve efficiency and tools with large Technology Adoption generate data and companies or other insights to be more startups to accelerate competitive in a global their growth and create and connected world. new ecosystems.

8. https://steveblank.com/2010/01/25/whats-a-startup-first-principles/

9. https://www.gemconsortium.org/country-profile/87

10. https://www.entrepreneur.com/article/304376 16 17 Small Businesses & Start-ups

Mexico, the public policy pendulum for 2 small business

18 19 Small Businesses & Start-ups

he National Institute of the Entre- the Development of the Competitiveness ● Prioritizing innovation and The Peña Nieto government built on preneur (INADEM for its name in of Micro, Small and Medium Enterprises technological development. the advances of the previous two admin- Spanish) included an interesting of 2002. Starting in about 2007, innovation was un- istrations and sought to give even more history of how the Mexican govern- Between 2001 and 2012 there were derstood not only as a tool of large com- weight to public policy aimed at SMEs Tment has adapted structurally and polit- three changes in public policy in Mexico panies, but also a method to increasing and entrepreneurs. The SPYME division ically to economic challenges in its libro that gave rise to the current ecosystem: competitiveness of all businesses. Finan- within the Ministry of Economy trans- blanco, a government-issued report for cial instruments were created to encour- formed into the National Institute of the transparency and to educate the public11. ● Focus on creating new companies. age the development of innovative ideas Entrepreneur (INADEM) with more power With this document and an Organization Formal public policy began to talk about in SMEs such as the Technological Inno- and resources. The total budget during for Economic Co-operation and Devel- the importance of startup entrepreneurs. vation Fund and programs like INNOVA- Peña Nieto’s six-year term was 43 billion opment (OECD) analysis of startups and They discussed other important com- PYME and PROINNOVA, financed by both pesos and they administered much of SMEs in Mexico12 as foundations, we ponents of ecosystems like training pro- SPYME and the National Council for Sci- those resources through the new National sought to describe the SME/startup eco- grams and created infrastructure like the ence and Technology (CONACYT). Entrepreneur Fund. system in the country, what needs have National System of Incubators and the Other key organizations in the cur- Perhaps the greatest achievement of been resolved over time, and what chal- Mexico Emprende centers. rent innovation ecosystem were created INADEM was how it maintained and grew lenges are ahead. In the Felipe Calderon administration during that time as well such as technol- what worked well in the past while giving they found that some small business- ogy parks, industry associations, and ac- the Mexican entrepreneurial ecosystem Ecosystem and Public Policy es performed better than others (growth celerators. Among the many accelerators a single hub. It also helped in increasing above 15%, lean and resilient organiza- with presence in Mexico now, TechBA is the size and diversity of the ecosystem The government administration of Miguel tional structures, and better asset turn- one coordinated by FUMEC (Mexico-Unit- with more angel investors, venture capital de la Madrid was the first time the country over) and named them “gazelle compa- ed States Foundation for Science) that funds, incubators, accelerators, fab-labs, formally paid attention to the SME indus- nies,” an early predecessor to the modern connects Mexican companies with eco- and coworking spaces. try and took a stance that increasing the startup concept. systems in the United States. competitiveness of small businesses was critical to breaking the economic crisis of ● Diversification of Financing the seventies. This marked the birth of a The SME Fund (Fondo PYME) was creat- Starting in 2007, program designed to tackle the specific ed as a source of financial support for all it began to be needs of SMEs that still sound familiar to SMEs and entrepreneurs. Financial policy understood that us today: technology adoption, capacity first evolved from subsidies and loans to innovation was building, financing, and access to internal loans and credit guarantees, then later to- and external markets. ward the development of capital markets. not an exclusive The Carlos Salinas and Ernesto Ze- The National System of Guarantees, activity of large dillo administrations maintained and ex- implemented during this period, is consid- companies panded the effort to create differentiated ered by the OECD as a best practice in and financial policy and services for SMEs in Mexico. public policy. This program had a goal to As the country’s economy opened to the improve access to financing for SMEs and instruments rest of the world, the Mexican government was efficient in improving their credit rat- were created to focused on modernizing companies to ings while keeping costs low and increas- encourage the compete in foreign markets and began to ing competition in the banking sector. development of foster the integration of key supply chains, Finally, the capital markets opened up such as the automotive industry. as a potential funding source due to the innovative ideas Vicente Fox’s government for the first creation of angel in SMEs. time created a formal entity within the investor clubs and the Fund of funds Ministry of Economy focused on the de- that launched venture capital funds that velopment of SMEs (SPYME) and a legal invested in early stage, high growth com- framework to classify them in the Law for panies (startups).

11. https://www.brookings.edu/research/high-growth-firms-and-cities-in-the-us-an-analysis-of-the-inc-5000/ 20 21 12. https://www.inadem.gob.mx/wp-content/uploads/2018/12/Libro-Blanco-POLI%CC%81TICA-DE-MIPYMES.pdf Small Businesses & Start-ups

Challenges of public policy in Mexico

One case that demonstrates the suc- ● Second. Mexico has experienced a cess of public policy support for entrepre- continuous decline in productivity caused neurship during the past six years is the by low levels of value added per person Reduce Financial Competency Innovation Participation sub-sector of FinTech companies. Mexico employed by SMEs. informatility inclusion development and in the global now has more than 300 startups focused These two points suggest that Mexico technology economy on financial technologies and a regulatory needs to balance its public policy to both adoption framework through the Law to Regulate incentivize the creation of high growth About 31 percent Although there has SMEs still have In 2016, SMEs Institutions of Financial Technology creat- startups and boost the productivity of of workers in the been progress, the limited options to The country’s gross accounted for only country are not ed in 2018. The FinTech ecosystem also more traditional SMEs. After consulting share of people access loans, so domestic spending 5.4% of exports. qualified enough for has a positive impact on the country’s various sources of public policy analysis, working in informal efforts such as the on research and Chapter 25 of their jobs. Both the SMEs because many of the startups of- including the OECD, there seems to be sectors remains high, loan guarantee development has the new USMCA National Productivity fer financial inclusion solutions: access to consensus about five major priorities to in- representing 57 program should be barely risen, from agreement provides Committee14, created credit, collective investment, digital pay- crease the productivity of SMEs in Mexico, percent of jobs in increased. 0.3 percent to 0.5 a base to develop in 2013, and the 2016. of GDP in the last tools to promote the ment tools, and new ways to move money as appreciated in the table of the right. OECD15 have twenty years16. China integration of SMEs through virtual assets. addressed the need has duplicated its in trade among the Challenges to improve lifelong R&D spending from Small Business and Startup Needs skills training and three countries. 0.9 to 2.1 percent The government of Andres Lopez Obrador, more effective use of during the same In January 2017 the OECD made two inaugurated in December 2018, has taken those skills at work. period. The OECD important observations about SMEs and steps that appear to be going against the 13 average is 2.3 startups in Mexico : noted trends of the last 30 years, and es- percent of GDP. pecially the last three administrations. The proportion ● First. There has been a lot of empha- First, INADEM has been dissolved of innovations is sis in recent public policy to regulate high and the funding for the National Entrepre- particularly low in growth companies - what we define as neur Fund has been reduced to the min- SMEs. startups in this paper - that make up 10 to imum necessary to finish the programs 15 percent of the total number of compa- and recruitment currently in progress. nies; the rest of the small businesses that Meanwhile, the Ministry of Economy has make up more than 50 percent of Mexi- announced plans to create a National co’s employment have been neglected. Program of Microentrepreneur Financing that will grant more than 3 billion pesos in microcredit to the smallest companies if the increases for business innovation the Ministry of Economy has committed to in marginalized areas. These initial steps programming from the Ministry of Econ- working with SMEs, with a particular focus have swung the pendulum to the other omy offset the cuts in CONACYT and the on the most marginalized companies and side: minimum support to companies with impacts these changes will have on the populations. Meanwhile, the federal gov- A case that shows the success high growth potential and more for the tra- country’s gross domestic spending on re- ernment has announced one of their most ditional small business. search and development. ambitious programs called Youth Building of the policy of support for Next, it appears that CONACYT, the Finally, it has been announced the Future (JCF for its name in Spanish). entrepreneurship is the sub- entity in charge of promoting science and that ProMexico, an organization created in The program has a 44 billion peso budget technology, will likely experience budget 2007 to boost exports in the country, will and focuses on the development of tech- ecosystem of FinTech companies, cuts particularly in programs focused on close. In contrast, the Ministry of Econo- nical and soft skills for people between 18 stimulating business innovations. How- my named commercial diversification as and 29 years old. This program has the which already has more than 300 ever, the Ministry of Economy announced one of its new objectives and has prom- potential to develop skills needed in the startups in Mexico. increases to the Program for the Devel- ised to support SMEs with exports. workplace, a key need among both SMEs opment of the Software Industry (Prosoft) While there have been various structur- and startups. and the Program for Industrial Productivity al and budgetary changes, it appears that and Competitiveness (PPCI). Once these budget changes occur it will be more clear 14. https://www.oecd.org/policy-briefs/mexico-incrementar-la-productividad-en-las-pequenas-empresas-tradicionales.pdf

15. https://www.gob.mx/cms/uploads/attachment/file/388189/7._Recomendaciones_SFH.PDF 22 23 13. https://read.oecd-ilibrary.org/industry-and-services/temas-y-politicas-clave-sobre-pymes-y-emprendimiento-en-mexico_9789264204591-es 16. https://www.oecd.org/mexico/Diagnostico-de-la-OCDE-sobre-la-Estrategia-de-Competencias- Destrezas-y-Habilidades-de-Mexico-Resumen-Ejecutivo.pdf Small Businesses & Start-ups

The United States, maintaining innovation 3 leadership

24 25 Small Businesses & Start-ups

Usefulness of SBA management and technical assitnace training programs Percentage by client business development stage, 2011 nlike Mexico, the startup and In addition to serving small business- small business ecosystems are es, the SBA has also opened its services SBA Resource Partner fairly distinct from one another. to startups that technically qualify as small One reason for the distinction is businesses according to their size and/or Uthat the United States dedicated resourc- annual receipts. A study in 2011 found that Small Business 81% 81% 76% 79% es to small businesses early on with the startups and nascent businesses found Development Centers formal creation of the SBA in 1953. How- SBA Management and Technical Assis- ever, even before that the philosophy and tance Training Programs as useful or more SCORE 76% 72% 71% 73% mission of the organization lived in a num- useful than traditional small businesses as ber of agencies built as a response to the you can see in the table below. Women Business Centers 75% 84% 78% 79% pressures of the Great Depression. While these services are available to startups, we still see the ecosystems as Ecosystem distinct - mostly due to the fact that the Nascent Startup In-Business Overall startup ecosystem was born and grew out Percentage responding extremely useful or useful The federal government sought to support of the dot com bubble largely separate small businesses during World War 2 as from the federal government and SBA. Sil- they were not able to compete with larger icon Valley has long been a hub for tech- companies to win war contracts. At that nological innovation and paved the way time and moving forward, the federal gov- for the development of various startup ernment committed to support small busi- ecosystems around the country. Startup founders in the US are also taxes, regulation, employees, and costs. nesses. The SBA has grown since in terms According to the Startup Genome re- slightly distinct from other parts of the The table below highlights the most se- of its total assistance and diversity of pro- search initiative, global entrepreneurship world. The Startup Genome studies what vere and least severe issues ranked by grams including financial and federal con- is trending toward high-tech and that is percent of founders have a builder mind- 2,831 small business owners in the United 20 tract procurement assistance, manage- also the case in the United States. They set, success defined as scaling a venture States : ment assistance, specialized advice on claim that to find success as a startup profitably over a 10 to 15 year period, or Exporting products and services has international trade, and specialized out- in the current global ecosystem, a com- a entrepreneur mindset, success defined consistently been ranked one of the least reach to women, minorities, armed forces pany must either 1) tackle specific Third as an exit within 5 years for $6 million to severe problems for small business own- veterans and victims of natural disasters. Wave verticals - like Uber for mobility or $1.2 billion. The average builder mind- ers, something of note especially con- Given the early creation of the SBA, the Airbnb for hospitality or 2) build business- set across the United States was 40% sidering the bilateral agenda between small business environment was created es through technological breakthroughs (compared to a 32.5% global average) the US and Mexico. Only 3 percent of and expanded through this centralized such as Blockchain, AI or Life Sciences19. and the average entrepreneur mindset respondents found exporting to be a crit- agency. As mentioned before in this pa- This is exactly where the United States was 23.9% (compared to a 20.5% glob- ical issue and 59 percent found it to be per, the SBA administers its services on is growing as well, with the sub-sectors al average). The startup ecosystem in the “not a problem.” It appears that some a local level through the creation of SB- most represented in 10 startup ecosys- United States is much more robust than small business owners are disinterested DCs. There are over 900 SBDC service tems in the country being: other parts of the world due to the high in exporting and the ones who are find sites around the country that modify their concentration of capital, talent, mentors, sufficient resources to get it done. services to meet the evolving needs of investors and scaling experience. Since many of the most severe prob- 17 the small businesses in their area . The 1. AI, Big Data, and Analytics lems facing small business owners were 2018 budget of the SBA was a little over Small Business very dependent on the national agenda, $1 billion with $269.5 million allocated to 2. Advanced Manufacturing and Startup Needs it is important to look at which problems salaries and expenses, $152 to the busi- and Robotics are of increasing importance that may be ness loan administration, $125 to small addressed through a bilateral approach. 3. Health and Life Sciences The National Federation of Independent business development centers, and $31 Business has published nine editions of The five problems with the most increas- 18 million to the microloan program . The 4. Fintech the Small Business Problems and Priori- ing importance were finding and keeping agency’s funding over time has been fair- 5. Cleantech ties report with the most recent edition in skilled employees, locating qualified em- ly constant, not falling below $800 million 2016. Of their problem clusters they found ployees, minimum wage/living wage, and since 2000. that the most severe four, in order, were employee turnover.

17. https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm 19. https://fas.org/sgp/crs/misc/R43846.pdf 26 18. https://www.sba.gov/offices/headquarters/osbdc/resources/11409 27 20. https://startupgenome.com/all-report-thank-you/?file=2018 Small Businesses & Start-ups

Problems of small businesses in USA Small Business Problems and Priorities 2016. Challenges A challenge Although small businesses and startups that both small 1. Cost of health insurance experience many similar issues, the most businesses 2. Unreasonable government regulations acute challenges facing each in the United States are distinct. As cited above, small and startups 3. Federal taxes on business income businesses are mostly concerned with le- 4. Uncertainty over Economic Conditions experience, is gal frameworks and administrative work 5. Tax Complexity that keeps them from the core of their the attraction of 6. Uncertainty over Government Actions business. A study by Deloitte found there talent to their 7. Frequent Changes in Federal Tax Laws are substantial benefits to adopting digi- and Rules tal technology. The top 20% most digitally organizations. 8. Property Taxes advanced small businesses21: 9. State Taxes on Business Income 10. Locating Qualified Workers ● Earned 2 times as much revenue per employee More severe problems More severe ● Experienced revenue growth over the previous year that was nearly 4 times as high ● Were almost 3 times as likely to be 66. Access to High-Speed Internet creating jobs over the previous year 67. Bad debts (not delinquencies) and/or ● Had an average employment growth bankruptcies rate that was more than 6 times 68. Costs and Frequency of lawsuits/ as high threatened lawsuits ● Were 3 times as likely to have 69. Obtaining long-term business loans (5 exported over the previous year years or more) 70. Obtaining short-term business loans (less While small businesses themselves than 12 months or revolving) did not cite technology adoption as a challenge, it is a clear path to increased 71. Credit Rating / Record Errors growth and competitiveness. 72. Winning contracts from Federal/State/ Some of the largest challenges for However, this is also one reason the The profiles of a small business employ- Least severe problems Least severe Local governments startups in the United States is growth market is so competitive - barriers to en- ee and a startup one are distinct, but both 73. Undocumented workers in the face of very competitive markets. try are low, there is fairly good access to are especially in need for technology skills 74. Out-of-State Sales Tax The legal framework of the United States capital, and the market is full of seasoned and realize the importance of finding top 75. Exporting my products / services and the cultural attitude toward failure entrepreneurs. Growth is also a large chal- performers to transform their businesses. allows for startup founders to be more lenge for these companies because they Whether or not the company is disrupt- experimental and innovative than other must be able to assess when they have ing the market, there are characteristics countries. found product market fit and how to sus- of the modern economy that the current tain high levels of growth in fairly saturat- workforce is not completely prepared to ed markets. address. Exponential technologies can One challenge that both small busi- both be used to create a new company nesses and startups experience is with or expand the reach and operations of an attracting talent to their organizations. existing company.

28 21. https://www.nfib.com/assets/NFIB-Problems-and-Priorities-2016.pdf 29 Small Businesses & Start-ups

Bilateral 4 Agenda

30 31 Small Businesses & Start-ups

he small business and startup eco- across a number of subjects. As interna- systems across the United States tional trade has evolved, it is clear that and Mexico serve both countries treaties cannot solely focus on commercial What we are doing in boosting economic growth, job transactions, especially between countries Tcreation and innovation. While each coun- with large differences in income per capi- try has its own challenges that must be ta. The flows of goods and services is very at addressed domestically, there are a few important because it closely affects invest- issues that may be better tackled through ments and jobs, so moving forward the bi- a bilateral agenda. lateral agenda must address the impacts of international trade in a holistic way. Talent The most immediate next steps for the Lab4 is a nonprofit initiative launched out In the area of access to the market, The Fourth Industrial Revolution is trans- US and Mexico is to operationalize the of Mexico Media Lab, an innovation agen- we provide services to connect startups forming modern economies and has cre- policy established in chapters 25 (SMEs) cy focused on the implications of Industry and small businesses to corporate clients. ated a skills gap that must be addressed and 26 (Competitiveness) through the in- 4.0 in Mexico and Latin America. For small businesses, access to corporate to support the growth of both small busi- tegration of committees who can establish clients is about relationship building and nesses and startups. In Mexico, the top regional objectives to increase competi- Our three objectives are: scaling operations to a level that meets emerging occupations are software devel- tiveness of SMEs and small businesses in a large client’s needs. For startups, the oper, medical assistant, social media spe- both countries. This includes connecting 1. Increase technology adoption sales process requires more customer cialist, human resources specialist, and institutions such as the SBA and Minis- of SMEs discovery and iteration to test product recruiter. The top emerging occupations try of Economy who are driving the SME market fit. We identify where startups and in the United States are software devel- agenda on each side of the border. Rather 2. Facilitate access to markets small businesses are and support them in oper, recruiter, business strategist, mar- than focusing on the volume of trade, we for SMEs and startups closing contracts with clients. keting specialist and real estate broker. must shift the conversation to integrating The creation of a comprehensive bilateral regional value chains more efficiently to 3. Provide new skills training Finally, talent is also a large need for workforce development agenda is a great make North America a more competitive to the workforce both small businesses and startups, a opportunity for the US and Mexico. region with the rest of the world. need Lab4 addresses from a number of Another trend to note is the emergence A constant challenge in public policy for perspectives. First, from a research per- of distributed talent through remote and Innovation SMEs and small businesses is to design spective Lab4 focuses on four important freelance networks. The future of work has The Startup Genome project has studied projects that recognize and adapt to the industries with respect to Industry 4.0 in shown many organizations and workers entrepreneurial ecosystems around the diversity of situations that may arise. Un- Mexico - aerospace, automotive, chem- that labor agreements are changing and world and concluded that the ecosystems derstanding this challenge and the need icals, and energy - and maps out the flexible arrangements are more common that focused on global markets grew twice for personalized support, we designed an skills most relevant for workers. Then, in than ever before. Two countries with such as fast as those focused on national mar- index that measures the level of techno- collaboration with partners and through large populations in such close proximity kets22. This suggests that the global con- logical maturity of an SME that also identi- proprietary curriculum, Lab4 offers skills must work together to create a regional nectedness of entrepreneurial and inno- fies what type of technology adoption will development to young workers to enter advantage in skills development and tech- vation ecosystem is a worthy goal in the have the most impact on their business. into those industries with the skills al- nological tools to add value to the market. conversation of regional competitiveness. Once an SME is diagnosed, they can par- ready in demand. Through our work with There is a great opportunity to scale up ticipate in Lab4 bootcamps that 1) help small businesses we have also identified a initiatives such as TechBA from FUMEC to them identify how technology can help number of skills needed to aide technolo- International Trade create connections between companies, them solve real business needs and 2) gy adoption and train workers and young The signing of the US-Mexico Canada investors, research centers and other ac- put them in direct contact with technology people to fill the gaps and support small Agreement (USMCA) is a great opportu- tors in both countries. providers that can reach them how to use business growth in their communities. nity to design a new bilateral relationship tools aligned with those needs. We have already worked with partners like: AT&T, Facebook, Google, IBM, Kio Networks, Microsoft and SAP.

22. https://startupgenome.com/global-connectedness-the-key-to-fast-growing-startups-and-ecosystems/ 32 33 Small Businesses & Start-ups

Sources

Acuerdo por el que se establece la estratificación de las micro, pequeñas y medianas empresas. (30 de junio 2009). Diario Oficial de la Federación. Recuperado de http://dof.gob.mx/nota_detalle_popup.php?codigo=5096849

Blank, Steve. (25 de enero de 2010). What’s A Startup? First Principles. Steve Blank. Recuperado de https://steveblank. com/2010/01/25/whats-a-startup-first-principles/

Connecting Small Businesses in the US. (2017). Deloitte. Recuperado de https://www2.deloitte.com/content/dam/Deloitte/us/Docu- "We can not solve problems using ments/technology-media-telecommunications/us-tmt-connected-small-businesses-Dec2017.pdf Dilger, Robert Jay. (16 de febrero 2018). Small Business Administration (SBA) Funding: Overview and Recent Trends. Congressional Research Service. Recuperado de https://fas.org/sgp/crs/misc/R43846.pdf the same kind of thinking we had Dorantes, Ricardo. (22 de agosto de 2018). Qué es una startup. Entrepreneur. Recuperado de https://www.entrepreneur.com/article/304376

Entrepreneurial Behaviour and Attitudes (2017). Global Entrepreneurship Monitor. Recuperado de https://www.gemconsortium.org/ when we created them." country-profile/87

Eric Ries' Definition of a Start-up. (Sin fecha). Inc. Recuperado de https://www.inc.com/eric-ries/eric-ries-how-to-define-a-start-up.html

—Albert Einstein. Global Startup Ecosystem Report 2018. (2018). Startup Genome. Recuperado de https://startupgenome.com/all-reports/?file=2018

Graham, Paul. (Septiembre de 2012). Startup = Growth. Paul Graham. Recuperado de http://www.paulgraham.com/growth.html

Hathway, Ian. (5 de febrero 2018). High-growth firms and cities in the US: An analysis of the Inc. 5000. Brookings Institution. Retrieved from https://www.brookings.edu/research/high-growth-firms-and-cities-in-the-us-an-analysis-of-the-inc-5000

Instituto Nacional del Emprendedor. (2013). Libro Blanco. Política de MiPymes/INADEM 2013-2018. México: Secretaría de Economía.

OCDE (12017) Diagnóstico de la OCDE sobre la Estrategia de Competencias, Destrezas y Habilidades de México. OCDE. Recuperado de https://www.oecd.org/mexico/Diagnostico-de-la-OCDE-sobre-la-Estrategia-de-Competencias-Destrezas-y-Habilidades-de-Mexi- co-Resumen-Ejecutivo.pdf

OECD. (2019). Gross domestic spending on R&D (indicator). OECD. doi: 10.1787/d8b068b4-en

OECD. (2017). Mexico Policy Brief. OECD. Recuperado de https://www.oecd.org/policy-briefs/mexico-incrementar-la-productividad-en-las-pequenas-empresas-tradicionales.pdf

OECD. (2013) Temas y políticas claves sobre PYMES y emprendimiento en México. OECD Publishing.

Recomendaciones para confirmar el sistema de formación de habilidades a lo largo de la vida para México. (Sin fecha). Comité Nacional Contact us! de Productividad. Recuperado de https://www.gob.mx/cms/uploads/attachment/file/388189/7._Recomendaciones_SFH.PDF Resources. (Sin fecha). U.S. Small Business Administration. Recuperado de https://www.sba.gov/offices/headquarters/osbdc/resources/11409 [email protected] Startup Genome. (22 de octubre 2018). Global Connectedness: The Key to Fast-Growing Startups and Ecosystems.Startup Genome. [email protected] Recuperado de https://startupgenome.com/global-connectedness-the-key-to-fast-growing-startups-and-ecosystems/

Wade, Holly. (Agosto de 2016). Small Business Problems and Priorities. National Federation of Independent Business. Recuperado de Flora 11, Roma Norte https://www.nfib.com/assets/NFIB-Problems-and-Priorities-2016.pdf Mexico City What is an SME? (2018). European Commission. Recuperado de http://ec.europa.eu/growth/smes/business-friendly-environment/ sme-definition_en

35 36