Costa Rica Startup Ecosystem Mapping 2016

52
1 Costa Rica Startup Ecosystem Mapping: actors, connections and best practices

Transcript of Costa Rica Startup Ecosystem Mapping 2016

Page 1: Costa Rica Startup Ecosystem Mapping 2016

1

Costa RicaStartup

EcosystemMapping actorsconnections and

best practices

When asked to map the startup ecosystem in Costa Rica the first question that came to mind was ldquoWhyrdquo There were existing studies both for the country and for Latin America with detailed metrics across multiple variables and indexes comparing Costa Rica to the rest of the world Was there a need for anything else

Since then many organizations have been talking about articulating the ecosystemrsquos existing initiatives It seemed reasonable that if the goal was to connect actors it was important to know who they were what they were doing and what conditions were either helping or preventing them from working together

Thus we developed a different type of mapping one that was qualitative instead of quantitative in nature one without the goal of measuring the variables of the startup community but rather to listen and learn from its actors one with a final outcome that was not a ranking but actionable insights This mapping accounts for the human dimension of starting a business and the cultural traits that influence relationship building collaboration and risk taking It encompasses elements that people might discuss over a beer but that rarely find their way into scientific reports

On one hand this study serves as an actual mapmdashit can help us navigate the

startup ecosystem It shows us who the organizations are what they are doing and how they are attempting to contribute to the startup community This is then about helping entrepreneurs connect and find the resources they need with less trial and error

But on the other hand this mapping is also actionable Starting your own company running an incubator or investing in a promising startup isnrsquot just about connecting itrsquos also about doing If there are others who have successfully faced and in some cases resolved these challenges wouldnrsquot it be great if we could learn from them Because of that this map is also about sharing what has worked for some of the more experienced members of the community as well as what hasnrsquot and what theyrsquove learned in the process If we wish to articulate our efforts what better place to start than sharing experiences

We bet on visibility as the way to foster the articulation everyone is talking about Getting to know one another sharing our individual challenges sparking conversations in the human and cultural dimensionmdashin short coming up with alternative solutions collectively and helping those who are just joining in Hopefully this is just the beginning This cannot be an individual effort but one shared by the entire community I hope you will join us

Prologue

Randall TrejosProject Director

2 3

4 5

Diego MayJunar

Vinicio ChantoSlidebean

Fernando ArceYo Emprendedor

Mariana VargasArias amp Muntildeoz

Gerardo VillalobosUNA

Emprendedores

Alejandro EgeaNacascolo Holdings

Marcelo LebendikerParquetec

Paula GuevaraConsultoriacutea

creativa

Carolina FloresAUGE

Sourav SharmaStartup Grind

Tomaacutes de CaminoFundacion Costa

Rica para la Innovacion

Carlos Mora de la OrdenCapitalescom

Sergio BallesterIndigo Drones

Jose Miguel ZamoraProject Intern

Adriaacuten GarciacuteaCarao Ventures

Priscilla MoreiraEmbajada de

Holanda

Carolina TabordaFundacion Costa

Rica para la Innovacion

David BulloacutenMICITT

Eric de la GoublayedelaGuayaba

Gustavo MadrigalMorpho

Animation Studio

Luis Alonso JimeacutenezAUGE

David PayneMentor

Inversionista

Alejandro VegaHuli

Angeacutelique LadureauMcKinsey amp

Company

Claudio PintoFairplay Labs

Rosaliacutea MoralesNIC Costa Rica

Moacutenica HidalgoImpactico

Carlos GallegosErnst amp Young

Maritza VargasUNA

Emprendedores

Alejandro BrenesEnertiva

Juan Joseacute MuntildeozOpen Future

POOM

Gabriela ArguedasProject Intern

Juan Carlos MartiacuteCIE TEC

Armando GonzaacutelezLead University

Randolf KisslingMentor

Inversionista

Federico ZoufalyMentor

Inversionista

Andrei FuentesParso

Paula Diacuteaz PGraphic Design

Paul Fervoy Miweb

Josueacute FumeroErnst amp Young

Vanessa LeanCuestamoras

Allan BoruchowiczCarao Ventures

This study is the result of hours of interviews with entrepreneurs mentors incubator directors investors government officials and other actors of the startup ecosystem Whether through formal interviews or more casual meetings their willingness to share their experiences perspectives and ideas is what made this study possible We thank them and acknowledge their most valuable contribution

On behalf of the Startup Costa Rica team we are very pleased to share the results of the research and analysis documented in this report We are also honored with the support and trust received from the British Embassy in Costa Rica by giving us the opportunity to generate what we believe is a fresh intimate view of the startup ecosystem and represents a series of valuable insights and tools for the most important actor in the startup ecosystem the entrepreneur

For a small young organization like ours the publication of this report is a major milestone but even more important is the experience wersquove had throughout the past several months conversing with major organizations and individuals working on entrepreneurship in the country There is much to do and many challenges within the startup ecosystem in Costa Rica but the openness genuine interest and commitment from everyone we worked with gives us hope that we are heading in the right direction

Finallywe would like to thank those who first believed in our organization and joined us on this journey Paula Guevara Rafael Cantildeas and Edgar Mora Also special thanks to Randall Trejos who lead this project since the start and remained committed far beyond its initial scope making the final product an even more comprehensive and valuable asset for the Costa Rican startup community

Acknowledgements

Ignacio Castro

Director Startup Costa Rica

7

Contents

6

- PROLOGUE 3

- ACKNOWLEDGEMENTS 4

- CONTENTS 7

- INTRODUCTION 8

- The purpose of the study- About this Report- About the Author - Startup Costa Rica and its Director- UK Science and Innovation Fund

- EXECUTIVE SUMMARY 13

- ACTORS OF THE ECOSYSTEM WHOrsquoS WHO 14

- FINDINGS

1 COSTA RICAN CULTURE 16

- Low trust leads to low collaboration- Low visibility leads to low collective learning- The path of stability through employment- Position towards mistakes No one wants to be ldquothat guyrdquo (or girl)- A well-educated and trained talent pool- Lack of saving and investment culture- Strong cultural bias toward socially-minded businesses- Opportunities to develop startup-friendly regulation

2 THE STARTUP COMMUNITY 26

- The SME ndash Startup distinction- The ldquowhordquo before the ldquowhatrdquo- Individual initiatives donrsquot always fit well together- Organizations and their sustainability- The critical mass problem- Entrepreneurship events and the effects of cross-pollination- Startup Competitions and their role in providing visibility and access to resources- Resource base Service providers canrsquot always adequately serve startups- Connectors Minding the gap between entrepreneurs and investors- The elusive success story A precedent the community is waiting for- Reinventing the wheel A lack of connection with more developed ecosystems

- An umbrella organization

3 THE ENTREPRENEUR 44

- The emotional price of becoming an entrepreneur- Ideal stage of life to start a company- When to leave your day job The dilemma of the part-time entrepreneurship- On sharing risk and equity The loner problem- Lack of understanding about private investment

4 THE STARTUP 50

- Step one Building the team- The quest for a business model How to turn an idea into a company- The need for speed Organic growth is not for everyone- Early stage funding Surviving the valley of death- Thinking local postponing global

5 FUNDING 58

- The available sources of funding- The Gap Seed or early stage funding- Friends and family as viable source (depending on the family)- Government money- A banking sector that is unable to serve startups- The ldquoaveragerdquo startup as a private investment opportunity- Scattered angels- The critical mass problem and its implication for investors- Investment clubs and acceleration- New generations of family businesses may create an alternative

- CONCLUSIONS AND THE PATH AHEAD 72

- A systemic issue- Culture underlies everything but culture is built from personal choices- Visibility and knowledge sharing will speed things up for everyone- Entrepreneurs must lead the wayA bet on a bottom-up approachA long-term vision of the ecosystem the organizationrsquos challenge

- FINAL THOUGHTS 76

- BEST PRACTICES 78

8 9

entrepreneurship in Costa Rica This is reflected not only in the informal writing style but also the content While many of the insights discussed may not seem new to seasoned actors within the ecosystem they will likely be new to entrepreneurs investors mentors and other stakeholders not closely in contact with the startup community Our intent is to share what wersquove learned of the ecosystemrsquos experiences with as many people as possible in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community

Finally through conversations and the shared interest of building bridges to assist collaboration some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship share best practices and articulate what have so far been isolated efforts We can only hope that this initiative will continue to gain traction until it becomes a movement We will do our part to see that it does ABOUT THIS REPORT

The findings in this report are organized into five sections each addressing a different determinant of the startup ecosystem ranging from macro conditions to individual cases

1 Costa Rican Culture This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development 2 The Startup Community Here we discuss

the dynamics among different actors of the startup community We also refer to the online mapping at wwwemprendimientocr were we provide a comprehensive list of all participants their role in the community their value proposition who are they targeting and how to contact them3 The Entrepreneur The main actors in the ecosystem in this section we analyze the individual factors that impact an entrepreneurrsquos decision to start a company and the day-to-day challenges this impliesmdashfrom risk profile and stage of life to the role of personal networks and business acumen in the success of the startup4 The Startup Once founded each company has its own challenges In this section we discuss the main obstacles young startups face in the local ecosystem5 Funding Finally because of the notable focus that most actors in the ecosystem give to the subject of funding in this section we layout the main sources of funding their implications and the impact that many initiatives have had on the startup community

During our discussion of the findings and challenges in each section we share best practices provided by these same actors during the interviews These should not be taken as definitive answers to a given problem nor as ldquorecipes for successrdquo but rather as a collection of lessons learned examples of practices that have worked in other ecosystems and diverse takes on how to overcome current challenges

We have also made an effort to provide as much context as possible in the form of external links and references so that interested readers can explore a topic in

IntroductionIn the last five years entrepreneurship has gained significant attention in Costa Rica With the creation of numerous incubators government sponsored competitions and increased media coverage starting a company now seems a rather viable option for many However as the majority of these initiatives emerge individually attention has recently shifted to how they can begin to connect and work together

When we view entrepreneurship as the result of interactions between many different actors rather than an isolated act of a single entrepreneur we move the conversation to one about ecosystems relationships and connections When seeking examples of cities where startups thrive it is often not one single element that contributes to a companyrsquos creation itrsquos a combination of conditions actors and the synergies created by the links between them

THE PURPOSE OF THE STUDY The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities More importantly to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community At its core this study is an attempt to gather

systematize and openly share the knowledge and experience of the communityrsquos main participants Through interviews with more than 30 entrepreneurs investors incubators and program directors as well as government officials we have gone beyond just mappingmdashto generating insights and sharing best practices

Many of the ideas expressed in this report come directly from the actors interviewed and may reflect personal opinions that are of course subject to debate Whenever authorized by the interviewee we have included quotes as a direct reference to their position We have also made the best possible effort to verify though all available means any facts and figures mentioned during the interviews

Unlike previous reports this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries For such quantitative and comparative studies you can refer to PRODEMrsquos 2015 Report for Latin America and GEMrsquos 2014 Report for Costa Rica For the present study we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors

We also wanted to make this report accessible for anyone interested in

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

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26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

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Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

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entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

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Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

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50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

FuN

DIN

G

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 2: Costa Rica Startup Ecosystem Mapping 2016

When asked to map the startup ecosystem in Costa Rica the first question that came to mind was ldquoWhyrdquo There were existing studies both for the country and for Latin America with detailed metrics across multiple variables and indexes comparing Costa Rica to the rest of the world Was there a need for anything else

Since then many organizations have been talking about articulating the ecosystemrsquos existing initiatives It seemed reasonable that if the goal was to connect actors it was important to know who they were what they were doing and what conditions were either helping or preventing them from working together

Thus we developed a different type of mapping one that was qualitative instead of quantitative in nature one without the goal of measuring the variables of the startup community but rather to listen and learn from its actors one with a final outcome that was not a ranking but actionable insights This mapping accounts for the human dimension of starting a business and the cultural traits that influence relationship building collaboration and risk taking It encompasses elements that people might discuss over a beer but that rarely find their way into scientific reports

On one hand this study serves as an actual mapmdashit can help us navigate the

startup ecosystem It shows us who the organizations are what they are doing and how they are attempting to contribute to the startup community This is then about helping entrepreneurs connect and find the resources they need with less trial and error

But on the other hand this mapping is also actionable Starting your own company running an incubator or investing in a promising startup isnrsquot just about connecting itrsquos also about doing If there are others who have successfully faced and in some cases resolved these challenges wouldnrsquot it be great if we could learn from them Because of that this map is also about sharing what has worked for some of the more experienced members of the community as well as what hasnrsquot and what theyrsquove learned in the process If we wish to articulate our efforts what better place to start than sharing experiences

We bet on visibility as the way to foster the articulation everyone is talking about Getting to know one another sharing our individual challenges sparking conversations in the human and cultural dimensionmdashin short coming up with alternative solutions collectively and helping those who are just joining in Hopefully this is just the beginning This cannot be an individual effort but one shared by the entire community I hope you will join us

Prologue

Randall TrejosProject Director

2 3

4 5

Diego MayJunar

Vinicio ChantoSlidebean

Fernando ArceYo Emprendedor

Mariana VargasArias amp Muntildeoz

Gerardo VillalobosUNA

Emprendedores

Alejandro EgeaNacascolo Holdings

Marcelo LebendikerParquetec

Paula GuevaraConsultoriacutea

creativa

Carolina FloresAUGE

Sourav SharmaStartup Grind

Tomaacutes de CaminoFundacion Costa

Rica para la Innovacion

Carlos Mora de la OrdenCapitalescom

Sergio BallesterIndigo Drones

Jose Miguel ZamoraProject Intern

Adriaacuten GarciacuteaCarao Ventures

Priscilla MoreiraEmbajada de

Holanda

Carolina TabordaFundacion Costa

Rica para la Innovacion

David BulloacutenMICITT

Eric de la GoublayedelaGuayaba

Gustavo MadrigalMorpho

Animation Studio

Luis Alonso JimeacutenezAUGE

David PayneMentor

Inversionista

Alejandro VegaHuli

Angeacutelique LadureauMcKinsey amp

Company

Claudio PintoFairplay Labs

Rosaliacutea MoralesNIC Costa Rica

Moacutenica HidalgoImpactico

Carlos GallegosErnst amp Young

Maritza VargasUNA

Emprendedores

Alejandro BrenesEnertiva

Juan Joseacute MuntildeozOpen Future

POOM

Gabriela ArguedasProject Intern

Juan Carlos MartiacuteCIE TEC

Armando GonzaacutelezLead University

Randolf KisslingMentor

Inversionista

Federico ZoufalyMentor

Inversionista

Andrei FuentesParso

Paula Diacuteaz PGraphic Design

Paul Fervoy Miweb

Josueacute FumeroErnst amp Young

Vanessa LeanCuestamoras

Allan BoruchowiczCarao Ventures

This study is the result of hours of interviews with entrepreneurs mentors incubator directors investors government officials and other actors of the startup ecosystem Whether through formal interviews or more casual meetings their willingness to share their experiences perspectives and ideas is what made this study possible We thank them and acknowledge their most valuable contribution

On behalf of the Startup Costa Rica team we are very pleased to share the results of the research and analysis documented in this report We are also honored with the support and trust received from the British Embassy in Costa Rica by giving us the opportunity to generate what we believe is a fresh intimate view of the startup ecosystem and represents a series of valuable insights and tools for the most important actor in the startup ecosystem the entrepreneur

For a small young organization like ours the publication of this report is a major milestone but even more important is the experience wersquove had throughout the past several months conversing with major organizations and individuals working on entrepreneurship in the country There is much to do and many challenges within the startup ecosystem in Costa Rica but the openness genuine interest and commitment from everyone we worked with gives us hope that we are heading in the right direction

Finallywe would like to thank those who first believed in our organization and joined us on this journey Paula Guevara Rafael Cantildeas and Edgar Mora Also special thanks to Randall Trejos who lead this project since the start and remained committed far beyond its initial scope making the final product an even more comprehensive and valuable asset for the Costa Rican startup community

Acknowledgements

Ignacio Castro

Director Startup Costa Rica

7

Contents

6

- PROLOGUE 3

- ACKNOWLEDGEMENTS 4

- CONTENTS 7

- INTRODUCTION 8

- The purpose of the study- About this Report- About the Author - Startup Costa Rica and its Director- UK Science and Innovation Fund

- EXECUTIVE SUMMARY 13

- ACTORS OF THE ECOSYSTEM WHOrsquoS WHO 14

- FINDINGS

1 COSTA RICAN CULTURE 16

- Low trust leads to low collaboration- Low visibility leads to low collective learning- The path of stability through employment- Position towards mistakes No one wants to be ldquothat guyrdquo (or girl)- A well-educated and trained talent pool- Lack of saving and investment culture- Strong cultural bias toward socially-minded businesses- Opportunities to develop startup-friendly regulation

2 THE STARTUP COMMUNITY 26

- The SME ndash Startup distinction- The ldquowhordquo before the ldquowhatrdquo- Individual initiatives donrsquot always fit well together- Organizations and their sustainability- The critical mass problem- Entrepreneurship events and the effects of cross-pollination- Startup Competitions and their role in providing visibility and access to resources- Resource base Service providers canrsquot always adequately serve startups- Connectors Minding the gap between entrepreneurs and investors- The elusive success story A precedent the community is waiting for- Reinventing the wheel A lack of connection with more developed ecosystems

- An umbrella organization

3 THE ENTREPRENEUR 44

- The emotional price of becoming an entrepreneur- Ideal stage of life to start a company- When to leave your day job The dilemma of the part-time entrepreneurship- On sharing risk and equity The loner problem- Lack of understanding about private investment

4 THE STARTUP 50

- Step one Building the team- The quest for a business model How to turn an idea into a company- The need for speed Organic growth is not for everyone- Early stage funding Surviving the valley of death- Thinking local postponing global

5 FUNDING 58

- The available sources of funding- The Gap Seed or early stage funding- Friends and family as viable source (depending on the family)- Government money- A banking sector that is unable to serve startups- The ldquoaveragerdquo startup as a private investment opportunity- Scattered angels- The critical mass problem and its implication for investors- Investment clubs and acceleration- New generations of family businesses may create an alternative

- CONCLUSIONS AND THE PATH AHEAD 72

- A systemic issue- Culture underlies everything but culture is built from personal choices- Visibility and knowledge sharing will speed things up for everyone- Entrepreneurs must lead the wayA bet on a bottom-up approachA long-term vision of the ecosystem the organizationrsquos challenge

- FINAL THOUGHTS 76

- BEST PRACTICES 78

8 9

entrepreneurship in Costa Rica This is reflected not only in the informal writing style but also the content While many of the insights discussed may not seem new to seasoned actors within the ecosystem they will likely be new to entrepreneurs investors mentors and other stakeholders not closely in contact with the startup community Our intent is to share what wersquove learned of the ecosystemrsquos experiences with as many people as possible in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community

Finally through conversations and the shared interest of building bridges to assist collaboration some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship share best practices and articulate what have so far been isolated efforts We can only hope that this initiative will continue to gain traction until it becomes a movement We will do our part to see that it does ABOUT THIS REPORT

The findings in this report are organized into five sections each addressing a different determinant of the startup ecosystem ranging from macro conditions to individual cases

1 Costa Rican Culture This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development 2 The Startup Community Here we discuss

the dynamics among different actors of the startup community We also refer to the online mapping at wwwemprendimientocr were we provide a comprehensive list of all participants their role in the community their value proposition who are they targeting and how to contact them3 The Entrepreneur The main actors in the ecosystem in this section we analyze the individual factors that impact an entrepreneurrsquos decision to start a company and the day-to-day challenges this impliesmdashfrom risk profile and stage of life to the role of personal networks and business acumen in the success of the startup4 The Startup Once founded each company has its own challenges In this section we discuss the main obstacles young startups face in the local ecosystem5 Funding Finally because of the notable focus that most actors in the ecosystem give to the subject of funding in this section we layout the main sources of funding their implications and the impact that many initiatives have had on the startup community

During our discussion of the findings and challenges in each section we share best practices provided by these same actors during the interviews These should not be taken as definitive answers to a given problem nor as ldquorecipes for successrdquo but rather as a collection of lessons learned examples of practices that have worked in other ecosystems and diverse takes on how to overcome current challenges

We have also made an effort to provide as much context as possible in the form of external links and references so that interested readers can explore a topic in

IntroductionIn the last five years entrepreneurship has gained significant attention in Costa Rica With the creation of numerous incubators government sponsored competitions and increased media coverage starting a company now seems a rather viable option for many However as the majority of these initiatives emerge individually attention has recently shifted to how they can begin to connect and work together

When we view entrepreneurship as the result of interactions between many different actors rather than an isolated act of a single entrepreneur we move the conversation to one about ecosystems relationships and connections When seeking examples of cities where startups thrive it is often not one single element that contributes to a companyrsquos creation itrsquos a combination of conditions actors and the synergies created by the links between them

THE PURPOSE OF THE STUDY The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities More importantly to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community At its core this study is an attempt to gather

systematize and openly share the knowledge and experience of the communityrsquos main participants Through interviews with more than 30 entrepreneurs investors incubators and program directors as well as government officials we have gone beyond just mappingmdashto generating insights and sharing best practices

Many of the ideas expressed in this report come directly from the actors interviewed and may reflect personal opinions that are of course subject to debate Whenever authorized by the interviewee we have included quotes as a direct reference to their position We have also made the best possible effort to verify though all available means any facts and figures mentioned during the interviews

Unlike previous reports this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries For such quantitative and comparative studies you can refer to PRODEMrsquos 2015 Report for Latin America and GEMrsquos 2014 Report for Costa Rica For the present study we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors

We also wanted to make this report accessible for anyone interested in

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

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28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

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30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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Mu

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

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Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

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eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

FuN

DIN

G

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 3: Costa Rica Startup Ecosystem Mapping 2016

4 5

Diego MayJunar

Vinicio ChantoSlidebean

Fernando ArceYo Emprendedor

Mariana VargasArias amp Muntildeoz

Gerardo VillalobosUNA

Emprendedores

Alejandro EgeaNacascolo Holdings

Marcelo LebendikerParquetec

Paula GuevaraConsultoriacutea

creativa

Carolina FloresAUGE

Sourav SharmaStartup Grind

Tomaacutes de CaminoFundacion Costa

Rica para la Innovacion

Carlos Mora de la OrdenCapitalescom

Sergio BallesterIndigo Drones

Jose Miguel ZamoraProject Intern

Adriaacuten GarciacuteaCarao Ventures

Priscilla MoreiraEmbajada de

Holanda

Carolina TabordaFundacion Costa

Rica para la Innovacion

David BulloacutenMICITT

Eric de la GoublayedelaGuayaba

Gustavo MadrigalMorpho

Animation Studio

Luis Alonso JimeacutenezAUGE

David PayneMentor

Inversionista

Alejandro VegaHuli

Angeacutelique LadureauMcKinsey amp

Company

Claudio PintoFairplay Labs

Rosaliacutea MoralesNIC Costa Rica

Moacutenica HidalgoImpactico

Carlos GallegosErnst amp Young

Maritza VargasUNA

Emprendedores

Alejandro BrenesEnertiva

Juan Joseacute MuntildeozOpen Future

POOM

Gabriela ArguedasProject Intern

Juan Carlos MartiacuteCIE TEC

Armando GonzaacutelezLead University

Randolf KisslingMentor

Inversionista

Federico ZoufalyMentor

Inversionista

Andrei FuentesParso

Paula Diacuteaz PGraphic Design

Paul Fervoy Miweb

Josueacute FumeroErnst amp Young

Vanessa LeanCuestamoras

Allan BoruchowiczCarao Ventures

This study is the result of hours of interviews with entrepreneurs mentors incubator directors investors government officials and other actors of the startup ecosystem Whether through formal interviews or more casual meetings their willingness to share their experiences perspectives and ideas is what made this study possible We thank them and acknowledge their most valuable contribution

On behalf of the Startup Costa Rica team we are very pleased to share the results of the research and analysis documented in this report We are also honored with the support and trust received from the British Embassy in Costa Rica by giving us the opportunity to generate what we believe is a fresh intimate view of the startup ecosystem and represents a series of valuable insights and tools for the most important actor in the startup ecosystem the entrepreneur

For a small young organization like ours the publication of this report is a major milestone but even more important is the experience wersquove had throughout the past several months conversing with major organizations and individuals working on entrepreneurship in the country There is much to do and many challenges within the startup ecosystem in Costa Rica but the openness genuine interest and commitment from everyone we worked with gives us hope that we are heading in the right direction

Finallywe would like to thank those who first believed in our organization and joined us on this journey Paula Guevara Rafael Cantildeas and Edgar Mora Also special thanks to Randall Trejos who lead this project since the start and remained committed far beyond its initial scope making the final product an even more comprehensive and valuable asset for the Costa Rican startup community

Acknowledgements

Ignacio Castro

Director Startup Costa Rica

7

Contents

6

- PROLOGUE 3

- ACKNOWLEDGEMENTS 4

- CONTENTS 7

- INTRODUCTION 8

- The purpose of the study- About this Report- About the Author - Startup Costa Rica and its Director- UK Science and Innovation Fund

- EXECUTIVE SUMMARY 13

- ACTORS OF THE ECOSYSTEM WHOrsquoS WHO 14

- FINDINGS

1 COSTA RICAN CULTURE 16

- Low trust leads to low collaboration- Low visibility leads to low collective learning- The path of stability through employment- Position towards mistakes No one wants to be ldquothat guyrdquo (or girl)- A well-educated and trained talent pool- Lack of saving and investment culture- Strong cultural bias toward socially-minded businesses- Opportunities to develop startup-friendly regulation

2 THE STARTUP COMMUNITY 26

- The SME ndash Startup distinction- The ldquowhordquo before the ldquowhatrdquo- Individual initiatives donrsquot always fit well together- Organizations and their sustainability- The critical mass problem- Entrepreneurship events and the effects of cross-pollination- Startup Competitions and their role in providing visibility and access to resources- Resource base Service providers canrsquot always adequately serve startups- Connectors Minding the gap between entrepreneurs and investors- The elusive success story A precedent the community is waiting for- Reinventing the wheel A lack of connection with more developed ecosystems

- An umbrella organization

3 THE ENTREPRENEUR 44

- The emotional price of becoming an entrepreneur- Ideal stage of life to start a company- When to leave your day job The dilemma of the part-time entrepreneurship- On sharing risk and equity The loner problem- Lack of understanding about private investment

4 THE STARTUP 50

- Step one Building the team- The quest for a business model How to turn an idea into a company- The need for speed Organic growth is not for everyone- Early stage funding Surviving the valley of death- Thinking local postponing global

5 FUNDING 58

- The available sources of funding- The Gap Seed or early stage funding- Friends and family as viable source (depending on the family)- Government money- A banking sector that is unable to serve startups- The ldquoaveragerdquo startup as a private investment opportunity- Scattered angels- The critical mass problem and its implication for investors- Investment clubs and acceleration- New generations of family businesses may create an alternative

- CONCLUSIONS AND THE PATH AHEAD 72

- A systemic issue- Culture underlies everything but culture is built from personal choices- Visibility and knowledge sharing will speed things up for everyone- Entrepreneurs must lead the wayA bet on a bottom-up approachA long-term vision of the ecosystem the organizationrsquos challenge

- FINAL THOUGHTS 76

- BEST PRACTICES 78

8 9

entrepreneurship in Costa Rica This is reflected not only in the informal writing style but also the content While many of the insights discussed may not seem new to seasoned actors within the ecosystem they will likely be new to entrepreneurs investors mentors and other stakeholders not closely in contact with the startup community Our intent is to share what wersquove learned of the ecosystemrsquos experiences with as many people as possible in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community

Finally through conversations and the shared interest of building bridges to assist collaboration some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship share best practices and articulate what have so far been isolated efforts We can only hope that this initiative will continue to gain traction until it becomes a movement We will do our part to see that it does ABOUT THIS REPORT

The findings in this report are organized into five sections each addressing a different determinant of the startup ecosystem ranging from macro conditions to individual cases

1 Costa Rican Culture This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development 2 The Startup Community Here we discuss

the dynamics among different actors of the startup community We also refer to the online mapping at wwwemprendimientocr were we provide a comprehensive list of all participants their role in the community their value proposition who are they targeting and how to contact them3 The Entrepreneur The main actors in the ecosystem in this section we analyze the individual factors that impact an entrepreneurrsquos decision to start a company and the day-to-day challenges this impliesmdashfrom risk profile and stage of life to the role of personal networks and business acumen in the success of the startup4 The Startup Once founded each company has its own challenges In this section we discuss the main obstacles young startups face in the local ecosystem5 Funding Finally because of the notable focus that most actors in the ecosystem give to the subject of funding in this section we layout the main sources of funding their implications and the impact that many initiatives have had on the startup community

During our discussion of the findings and challenges in each section we share best practices provided by these same actors during the interviews These should not be taken as definitive answers to a given problem nor as ldquorecipes for successrdquo but rather as a collection of lessons learned examples of practices that have worked in other ecosystems and diverse takes on how to overcome current challenges

We have also made an effort to provide as much context as possible in the form of external links and references so that interested readers can explore a topic in

IntroductionIn the last five years entrepreneurship has gained significant attention in Costa Rica With the creation of numerous incubators government sponsored competitions and increased media coverage starting a company now seems a rather viable option for many However as the majority of these initiatives emerge individually attention has recently shifted to how they can begin to connect and work together

When we view entrepreneurship as the result of interactions between many different actors rather than an isolated act of a single entrepreneur we move the conversation to one about ecosystems relationships and connections When seeking examples of cities where startups thrive it is often not one single element that contributes to a companyrsquos creation itrsquos a combination of conditions actors and the synergies created by the links between them

THE PURPOSE OF THE STUDY The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities More importantly to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community At its core this study is an attempt to gather

systematize and openly share the knowledge and experience of the communityrsquos main participants Through interviews with more than 30 entrepreneurs investors incubators and program directors as well as government officials we have gone beyond just mappingmdashto generating insights and sharing best practices

Many of the ideas expressed in this report come directly from the actors interviewed and may reflect personal opinions that are of course subject to debate Whenever authorized by the interviewee we have included quotes as a direct reference to their position We have also made the best possible effort to verify though all available means any facts and figures mentioned during the interviews

Unlike previous reports this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries For such quantitative and comparative studies you can refer to PRODEMrsquos 2015 Report for Latin America and GEMrsquos 2014 Report for Costa Rica For the present study we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors

We also wanted to make this report accessible for anyone interested in

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

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30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

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Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

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50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 4: Costa Rica Startup Ecosystem Mapping 2016

7

Contents

6

- PROLOGUE 3

- ACKNOWLEDGEMENTS 4

- CONTENTS 7

- INTRODUCTION 8

- The purpose of the study- About this Report- About the Author - Startup Costa Rica and its Director- UK Science and Innovation Fund

- EXECUTIVE SUMMARY 13

- ACTORS OF THE ECOSYSTEM WHOrsquoS WHO 14

- FINDINGS

1 COSTA RICAN CULTURE 16

- Low trust leads to low collaboration- Low visibility leads to low collective learning- The path of stability through employment- Position towards mistakes No one wants to be ldquothat guyrdquo (or girl)- A well-educated and trained talent pool- Lack of saving and investment culture- Strong cultural bias toward socially-minded businesses- Opportunities to develop startup-friendly regulation

2 THE STARTUP COMMUNITY 26

- The SME ndash Startup distinction- The ldquowhordquo before the ldquowhatrdquo- Individual initiatives donrsquot always fit well together- Organizations and their sustainability- The critical mass problem- Entrepreneurship events and the effects of cross-pollination- Startup Competitions and their role in providing visibility and access to resources- Resource base Service providers canrsquot always adequately serve startups- Connectors Minding the gap between entrepreneurs and investors- The elusive success story A precedent the community is waiting for- Reinventing the wheel A lack of connection with more developed ecosystems

- An umbrella organization

3 THE ENTREPRENEUR 44

- The emotional price of becoming an entrepreneur- Ideal stage of life to start a company- When to leave your day job The dilemma of the part-time entrepreneurship- On sharing risk and equity The loner problem- Lack of understanding about private investment

4 THE STARTUP 50

- Step one Building the team- The quest for a business model How to turn an idea into a company- The need for speed Organic growth is not for everyone- Early stage funding Surviving the valley of death- Thinking local postponing global

5 FUNDING 58

- The available sources of funding- The Gap Seed or early stage funding- Friends and family as viable source (depending on the family)- Government money- A banking sector that is unable to serve startups- The ldquoaveragerdquo startup as a private investment opportunity- Scattered angels- The critical mass problem and its implication for investors- Investment clubs and acceleration- New generations of family businesses may create an alternative

- CONCLUSIONS AND THE PATH AHEAD 72

- A systemic issue- Culture underlies everything but culture is built from personal choices- Visibility and knowledge sharing will speed things up for everyone- Entrepreneurs must lead the wayA bet on a bottom-up approachA long-term vision of the ecosystem the organizationrsquos challenge

- FINAL THOUGHTS 76

- BEST PRACTICES 78

8 9

entrepreneurship in Costa Rica This is reflected not only in the informal writing style but also the content While many of the insights discussed may not seem new to seasoned actors within the ecosystem they will likely be new to entrepreneurs investors mentors and other stakeholders not closely in contact with the startup community Our intent is to share what wersquove learned of the ecosystemrsquos experiences with as many people as possible in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community

Finally through conversations and the shared interest of building bridges to assist collaboration some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship share best practices and articulate what have so far been isolated efforts We can only hope that this initiative will continue to gain traction until it becomes a movement We will do our part to see that it does ABOUT THIS REPORT

The findings in this report are organized into five sections each addressing a different determinant of the startup ecosystem ranging from macro conditions to individual cases

1 Costa Rican Culture This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development 2 The Startup Community Here we discuss

the dynamics among different actors of the startup community We also refer to the online mapping at wwwemprendimientocr were we provide a comprehensive list of all participants their role in the community their value proposition who are they targeting and how to contact them3 The Entrepreneur The main actors in the ecosystem in this section we analyze the individual factors that impact an entrepreneurrsquos decision to start a company and the day-to-day challenges this impliesmdashfrom risk profile and stage of life to the role of personal networks and business acumen in the success of the startup4 The Startup Once founded each company has its own challenges In this section we discuss the main obstacles young startups face in the local ecosystem5 Funding Finally because of the notable focus that most actors in the ecosystem give to the subject of funding in this section we layout the main sources of funding their implications and the impact that many initiatives have had on the startup community

During our discussion of the findings and challenges in each section we share best practices provided by these same actors during the interviews These should not be taken as definitive answers to a given problem nor as ldquorecipes for successrdquo but rather as a collection of lessons learned examples of practices that have worked in other ecosystems and diverse takes on how to overcome current challenges

We have also made an effort to provide as much context as possible in the form of external links and references so that interested readers can explore a topic in

IntroductionIn the last five years entrepreneurship has gained significant attention in Costa Rica With the creation of numerous incubators government sponsored competitions and increased media coverage starting a company now seems a rather viable option for many However as the majority of these initiatives emerge individually attention has recently shifted to how they can begin to connect and work together

When we view entrepreneurship as the result of interactions between many different actors rather than an isolated act of a single entrepreneur we move the conversation to one about ecosystems relationships and connections When seeking examples of cities where startups thrive it is often not one single element that contributes to a companyrsquos creation itrsquos a combination of conditions actors and the synergies created by the links between them

THE PURPOSE OF THE STUDY The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities More importantly to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community At its core this study is an attempt to gather

systematize and openly share the knowledge and experience of the communityrsquos main participants Through interviews with more than 30 entrepreneurs investors incubators and program directors as well as government officials we have gone beyond just mappingmdashto generating insights and sharing best practices

Many of the ideas expressed in this report come directly from the actors interviewed and may reflect personal opinions that are of course subject to debate Whenever authorized by the interviewee we have included quotes as a direct reference to their position We have also made the best possible effort to verify though all available means any facts and figures mentioned during the interviews

Unlike previous reports this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries For such quantitative and comparative studies you can refer to PRODEMrsquos 2015 Report for Latin America and GEMrsquos 2014 Report for Costa Rica For the present study we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors

We also wanted to make this report accessible for anyone interested in

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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Mu

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

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Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 5: Costa Rica Startup Ecosystem Mapping 2016

8 9

entrepreneurship in Costa Rica This is reflected not only in the informal writing style but also the content While many of the insights discussed may not seem new to seasoned actors within the ecosystem they will likely be new to entrepreneurs investors mentors and other stakeholders not closely in contact with the startup community Our intent is to share what wersquove learned of the ecosystemrsquos experiences with as many people as possible in the hope that this will foster more connections and allow newcomers to more successfully insert themselves in the community

Finally through conversations and the shared interest of building bridges to assist collaboration some of the individuals and institutions interviewed have stepped forward to create what could be the beginning of a common platform to jointly promote entrepreneurship share best practices and articulate what have so far been isolated efforts We can only hope that this initiative will continue to gain traction until it becomes a movement We will do our part to see that it does ABOUT THIS REPORT

The findings in this report are organized into five sections each addressing a different determinant of the startup ecosystem ranging from macro conditions to individual cases

1 Costa Rican Culture This section describes the cultural and idiosyncratic variables that participants of the startup community identify as having had an impact on its development 2 The Startup Community Here we discuss

the dynamics among different actors of the startup community We also refer to the online mapping at wwwemprendimientocr were we provide a comprehensive list of all participants their role in the community their value proposition who are they targeting and how to contact them3 The Entrepreneur The main actors in the ecosystem in this section we analyze the individual factors that impact an entrepreneurrsquos decision to start a company and the day-to-day challenges this impliesmdashfrom risk profile and stage of life to the role of personal networks and business acumen in the success of the startup4 The Startup Once founded each company has its own challenges In this section we discuss the main obstacles young startups face in the local ecosystem5 Funding Finally because of the notable focus that most actors in the ecosystem give to the subject of funding in this section we layout the main sources of funding their implications and the impact that many initiatives have had on the startup community

During our discussion of the findings and challenges in each section we share best practices provided by these same actors during the interviews These should not be taken as definitive answers to a given problem nor as ldquorecipes for successrdquo but rather as a collection of lessons learned examples of practices that have worked in other ecosystems and diverse takes on how to overcome current challenges

We have also made an effort to provide as much context as possible in the form of external links and references so that interested readers can explore a topic in

IntroductionIn the last five years entrepreneurship has gained significant attention in Costa Rica With the creation of numerous incubators government sponsored competitions and increased media coverage starting a company now seems a rather viable option for many However as the majority of these initiatives emerge individually attention has recently shifted to how they can begin to connect and work together

When we view entrepreneurship as the result of interactions between many different actors rather than an isolated act of a single entrepreneur we move the conversation to one about ecosystems relationships and connections When seeking examples of cities where startups thrive it is often not one single element that contributes to a companyrsquos creation itrsquos a combination of conditions actors and the synergies created by the links between them

THE PURPOSE OF THE STUDY The purpose of our study was to map the various participants of the Costa Rican startup ecosystem and their respective capabilities More importantly to diagnose and highlight both the obstacles and opportunities these actors face in working together to strengthen the startup community At its core this study is an attempt to gather

systematize and openly share the knowledge and experience of the communityrsquos main participants Through interviews with more than 30 entrepreneurs investors incubators and program directors as well as government officials we have gone beyond just mappingmdashto generating insights and sharing best practices

Many of the ideas expressed in this report come directly from the actors interviewed and may reflect personal opinions that are of course subject to debate Whenever authorized by the interviewee we have included quotes as a direct reference to their position We have also made the best possible effort to verify though all available means any facts and figures mentioned during the interviews

Unlike previous reports this study does not aim to measure the Costa Rican startup ecosystem across variables for the purpose of benchmarking it against that of other countries For such quantitative and comparative studies you can refer to PRODEMrsquos 2015 Report for Latin America and GEMrsquos 2014 Report for Costa Rica For the present study we opted for a qualitative approach that would allow us to gather and share insights that do not correspond to measurable factors

We also wanted to make this report accessible for anyone interested in

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

eNtrepreN

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

StArtu

pS

52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 6: Costa Rica Startup Ecosystem Mapping 2016

10 11

greater detail check official websites from which the information was taken or contact organizations directly ABOUT THE AUTHOR

Randall Trejos is an advisor in startup and small business development and director of the Founder Institute in Costa Rica He specializes in sales marketing and communication with a strong focus on behavioral sciences

He writes about entrepreneurship social ventures and angel investment for organizations like Tico Times INCAE Business School and VIVA

Trejos studied Psychology at Universidad de Costa Rica Entrepreneurship in Rotterdam School of Management and has an MBA from INCAE Business School

STARTUP COSTA RICA AND ITS DIRECTOR The Startup Costa Rica Foundation is a nonprofit organization that supports projects programs and actions that aim to strengthen and accelerate the development of the startup ecosystem in Costa Rica It also seeks to collaborate share experiences and manage projects in a joint manner with other organizations and people within the country and around the world who share their vision

By collaborating in the launch of the Founder Institute in Costa Rica Startup Costa Rica has also created a space for experienced CEOs of both small startups and larger companies to coach and mentor young entrepreneurs

who are just starting their journey providing an opportunity for them to give back by sharing their knowledge and advising the next generation of business men and women in the country

Ignacio Castro Startup Costa Ricarsquos founder and director is a technology professional with extensive experience leading distributed software development teams and delivering projects to large global clients He has worked for such global organizations as Chiquita Brands Intel Houghton Mifflin Harcourt and NTT Data Since 2011 he has been involved in strategy and custom application development projects for companies such as SampP Citibank and Santander Bank

In 2011 he founded Startup Costa Rica with the goal of supporting entrepreneurs from Costa Rica through initiatives to promote entrepreneurship in the country He received an MBA from MIT Sloan School of Management and an Industrial Engineering and Computer Science degree from Universidad de Costa Rica

UK SCIENCE AND INNOVATION FUND Finally this study would not have been possible without the support of the British Embassy through the UK Science and Innovation Fund By helping to promote economic development through innovation capacity building in Costa Rica the initiative is filling an important research need thatmdashthough widely recognizedmdashoften lacks the funding to come to fruition

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

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28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

COM

Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

NItY

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

eNtrepreN

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 7: Costa Rica Startup Ecosystem Mapping 2016

12

There are many factors that determine a startup ecosystem and its ability to foster entrepreneurship Many of these are ldquohardrdquo factors like the availability of financing supporting public policy and technology infrastructure and adoption Others are ldquosoftrdquo variables such as cultural idiosyncrasies and social capital which are more difficult to measure but easily noticeable and widely reported by members of the community The third set of determinants has to do with the connections and dynamics between members of the startup ecosystem

The actors considered to be part of the startup ecosystem regardless of their role include entrepreneurs mentors investors incubators and programs entrepreneurship-related events coworking spaces governments universities and firms catering to startups such as legal accounting digital marketing etc

When it comes to macro variables such as public policy availability of financing and technology infrastructure the study found both challenges and opportunities

Government involvement in the startup community has been increasing in the past years but with slow visible progress Bureaucracy the lack of distinction between traditional small businesses and startups and the subjection of these to the same regulations as corporations are among entrepreneursrsquo common complaints Government-sponsored programs like Capital Semilla have helped close the gap of early stageseed investments however after two iterations the program was discontinued

As for private investment there are still challenges to investors and entrepreneurs successfully connecting due to the tendency

Executive Summary

13

to do business within close circles the lack of knowledge on both sides regarding venture capital and startup valuation and the large supply of investment vehicles traditionally perceived as safer Progress has been made through the organizations and individuals that serve as trust-based connectors between the two actors helping to bridge the current gap

Technological infrastructure and adoption along with a highly qualified talent pool are among Costa Ricarsquos startup ecosystemrsquos strong points identified in the study A strong education system particularly in technical and scientific fields is viewed as the golden opportunity for innovation-based startups in fields like software and biotech The talent pool however is highly influenced by the widespread presence of multinationals in the country both in terms of setting job market conditions as well as professional training and development The countryrsquos cultural and geographical proximity to the United States and the widespread use of the English language have also been identified as potential advantages particularly in terms of connecting to more mature ecosystems in US cities

When addressing cultural determinants the study pointed to the significant effect that Costa Ricansrsquo attitude towards trust has on startup success From the entrepreneurrsquos ability to find co-founders and team members outside their circles of friends to the difficulty of connecting to investors

and mentors a perceived low trust seems to be the constant in relationship building Ties with people outside the circle of family and friends were shown to be weak leading to unbalanced teams in terms of expertise or stark individuality Members of the community working in relative disconnection from one another has caused a low visibility of successful cases little sharing of best practices and repeated efforts to resolve the same challenges

Finally although the above factors are often cited and considered individually the study revealed the importance of analyzing the effects of the interdependence and dynamics between actors The cultural tendencies regarding relationship building collaboration and short-term thinking have caused what is known as ldquolow network densityrdquo or few connections between actors There are favorable conditions in terms of entrepreneurial talent support organizations government participation and an evolving investment landscape that could boost the ecosystem but just as long as those connections are strengthened The challenge for the startup community moving forward is how to increase its network density in order to foster more collaborative coordinated initiatives that take into account the ecosystem as a whole and focus on long-term development and sustainability Costa Rican Culture

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 8: Costa Rica Startup Ecosystem Mapping 2016

14 15

Actors of the Ecosystem Whorsquos who

A fundamental part of Mapping the Start-up Ecosystem is identifying the main actors that

in one way or another play a role in it By visiting wwwemprendimientocr you will find the

profile of all organizations that support entrepreneurs including

1 What the organization does and their role in the community

2 The profile of entrepreneur and type of projects or industries they focus on

3 The specific programs they offer and what entrepreneurs must do to take advantage of them

4 Their main contact information so you can easily reach them

e n t re p re n e u r s

m e n t o r s

c o w o r k i n gs p a c e sg ove r m e n t s

u n i ve r s i ti e s a n dre s e a rc h c e n t e r s

s u p p o r ti n g fi r m s re s o u rc e s

i n c u b a t o r s

a c c e l e r a t o r s

Eve n t s a n dc o m p e ti ti o n s

i n ve s t o r s

To make it easier to find the right organizations we have arranged them according to the stage of

the startup development their services are directed to however in many cases organizations will

be found in more than one stage Also notice that the stages outlined below are merely to provide

a guide each start-uprsquos reality is unique and some entrepreneurs might find it difficult to draw the

line between one stage and the next

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

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28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

COM

Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

COM

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

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50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 9: Costa Rica Startup Ecosystem Mapping 2016

16 17

Costa Rican idiosyncrasy was a commonly occurring theme during many of the interviews Cultural traits concerning collaboration how mistakes are perceived how much people trust one another and saving and investing habits to mention a few underlie many of the issues identified as challenges in the local startup ecosystem LOW TRUST LEADS TO LOW COLLABORATION

bull High and low trust societiesbull Idea stealingbull ldquoI can do it myselfrdquo mentalitybull Low trust among organizations

According to many interviewees Costa Ricans tend to be mistrustful of others which impacts their ability to collaborate

The subject of trust in societies has been amply studied 1and shows that social capitalmdashthe ability of its members to trust one another enough to form organizations beyond family circlesmdashis a key determinant in a societyrsquos ability to form large companies and at a macro level prosperity Latin American countries traditionally described as low trust societies show a tendency for weak ties outside the family strong individualism stark hierarchies and family-run businessesmdashall characteristics observed

by our interviewees The classic example mentioned is the reluctance of many entrepreneurs to share their ideas because of the underlying fear that these will be stolen This skepticism and assumptions about otherrsquos trustworthiness create conditions in which it is difficult for people to join efforts and work together on a project

During community events few entrepreneurs will openly share details about their ideas which limits their opportunity to connect with others Those who do talk more openly about their startups are usually the founders of more mature companies that have been in the market for some time These entrepreneurs however usually present themselves more as role models than as potential partners for collaboration

This lack of trust and collaboration leads to a ldquoI can do it myselfrdquo mentality which in turn creates an insurmountable challenge for entrepreneurs placing them in a position where they must handle all areas of the businessmdashsome of which they may be ill prepared for

As an alternative when starting a business many entrepreneurs resort to previously established ties with family members or close friends as a proxy for trust This culturally-rooted practice has implications for the creation

of project teams as many are based on familiarity rather than the talent the project requires (see The Startup)

The difficulties in collaboration that stem from a low trust cultural component are also present in the way that organizations in the ecosystem interact with one another (see The Startup Community)

Most organizationsmdashfrom incubators to programs from events to competitionsmdashseem to be trying to address the communityrsquos needs on their own often repeating efforts already present in the ecosystem instead of joining forces to create greater value for the community

FINDINGS

Costa Rican culture

a

1 For more on the subject of trust in societies refer to Trust The

social virtues and the creation of prosperity by Francis Fukuyama

Cultu

re

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 10: Costa Rica Startup Ecosystem Mapping 2016

18 19

ldquoThe Costa Rican is very humble and doesnrsquot like to brag This is why we

donrsquot hear about many success casesrdquo - Diego May Junar

LOW VISIBILITY LEADS TO LOW COLLECTIVE LEARNING

bull Keeping a low profile bull Invisible precedents bull Collective learning

Another cultural component mentioned extensively in our interviews is that Costa Ricans typically do not wish to ldquoput themselves out thererdquo and become too visible While some argue that this is rooted in the characteristic humbleness of the Tico others point to the tendency to avoid criticism and confrontation What is certain is that cases of success or failure are widely unknown and widely unreported

Low visibility has two implications On one hand success storiesmdashthe source of inspiration for young entrepreneurs and validation to incipient investorsmdashremain unknown to the public and therefore do not fulfill their role of creating precedents for the startup community Second if failures and their subsequent lessons are not shared with the rest of the ecosystem the opportunity to collectively learn and evolve is drastically reduced While in the case of failures there is an emotional component to how it is culturally assumed (see Costa Rican Culture) even in close circles conversations about failing and what was learned are largely absent

Finally many entrepreneurs reported that they did not wish to become too visible because it could expose them to ill-intentioned criticisms Resorting to a low profile may indeed protect entrepreneurs from harsh critics but at a very high price that of lost opportunities to connect with fellow entrepreneurs potential backers and service providers

Cultu

re

20 21

Cultu

re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

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Mu

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28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

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30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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Mu

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

COM

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 11: Costa Rica Startup Ecosystem Mapping 2016

20 21

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re

POSITION TOWARDS MISTAKES NO ONE wants to be ldquothat guyrdquo (or girl)

bull The elephant in the roombull The taboo of screwing upbull Learning from the mistakes (of others)

To acknowledge onersquos mistakesmdashand further to learn from themmdashis one of the most common pieces of advice that entrepreneurs receive from mentors and seasoned business people It is however easier said than done Although there is no definite indicator it is generally perceived that mistakes and lessons learned are rarely the subject of talks meetups or blog posts in the Costa Rican startup community

There are likely multiple reasons for this from wanting to remain positive and focus on whatrsquos working rather than whatrsquos not to wanting to save face with the community The fact is there are very few conversations regarding mishaps Of course generally speaking no one wants to make a mistake let alone admit to having made one but how the surrounding culture perceives errors drives entrepreneursrsquo behavior in a big way In the local startup community the fact

that it is a subject that most would rather avoid gives it a sense of taboo

This behavior also seems to reproduce itself in organizations that support entrepreneurs Metrics regarding successes and failures are not made public nor openly discussed Internally each organization analyzes its results and makes necessary changes This discussion however rarely involves other stakeholders One could argue that the lessons of each organization is ldquoits own businessrdquo and that sharing this information could lead to a competitive disadvantage While this is a valid rationale the tendency toward individual work rather than open collaboration is often the precursor for further fragmentation of the community Best practices are not shared and remain in the hands of a very small number of constituents who can only impact the individual segment of the community they serve

The implications for entrepreneurs as in the case of low visibility discussed above are twofold On one hand if the subject of mistakes is to be avoided or not openly shared this means that each startup risks shying away

ldquoOne of the main challenges entrepreneurs face here is that socially the environment doesnrsquot seem to support entrepreneurship When people take the

leap they donrsquot always get full support from their families or partners In our

case it has even interfered with our recruiting efforts Parents of candidates

have deterred them from joining a small unknown companyrdquo - Alejandro Vega Huli

THE PATH OF STABILITY THROUGH EMPLOYMENT

bull Stable public-sector jobsbull Entrepreneurship as a career pathbull Evangelizing entrepreneurship early on

When asked about the reasons that more startups arenrsquot created each year a surprisingly high number of respondents blamed what they believed to be a culturally rooted tendency of Costa Ricans to seek stability through employment with the government or multinational corporations

Though there is no definitive statistic it is estimated that at the end of 2013 the Costa Rican public sector was employing nearly 300000 people Public sector wages are an average of 150 higher than the private sector and it is widely recognized that public sector workers receive outstanding benefitsmdashfactors that help us understand its attractiveness Once in the workforce the price of walking away from a secure well-paying job in favor

of an uncertain venture isnrsquot just economic itrsquos psychological Costa Ricans who are considering a startup may feel that family and friendsmdasheven society as a wholemdashdonrsquot yet see entrepreneurship as a desirable career path Though this could be perceived as having a subtle almost negligible effect but for some entrepreneurs it has a very real impact

To counter these effects companies like Huli have taken it upon themselves to create a more supportive environment at home by educating the spouses or parents of employees about what startups are and the benefits of working for one

The topic of entrepreneurship in Costa Rica has only recently begun to reach the general public With the creation of incubators support programs and events media coverage has increased Students and young professionals are now beginning to see a startup as a viable career path The topic is still absent from many university programs however and entrepreneurship courses and seminars have only begun to pop up in the last four or five years

When we compare our region to more developed entrepreneurial ecosystems there seems to be a cultural theme where people bet on an big employer state or a multinational corporation instead of starting your own company or working for a startuprdquo - Allan Boruchowicz Carao Ventures

ldquoIn Costa Rica and most countries in Latin America it seems that making mistakes has a negative connotation while in other places it is celebrated this changes the willingness people have to take risks and their ability to learn from failuresrdquo - Diego May Junar

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

COM

Mu

NItY

36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

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50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

StArtu

pS

52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 12: Costa Rica Startup Ecosystem Mapping 2016

22 23

from the much needed internal discussion of whatrsquos not working and how to fix it On the other hand by not sharing it with others the community as a whole is deprived of a rich source of knowledge that could help propel it forward by ensuring that new entrepreneurs avoid past entrepreneursrsquo mistakes

a well-educated and trained TALENT POOL

bull Big corporations and skills developmentbull Developers are the new rock starsbull Talent wars David and Goliath

For the past two decades Costa Rica has been able to attract a growing number of direct foreign investments and has convinced multinational companies like Intel HP IBM PampG Amazon McKinsey Accenture VMWare and others to open or expand their operations in the country According to data from CINDE by 2013 nearly 87500 Costa Ricans worked for 250 multinational companies many of them in service industries representing 58 of the countryrsquos GDP that year The most commonly cited reasons for choosing Costa Rica include its high levels of education widespread knowledge of the English language and cultural and geographical proximity to the United States

Without a doubt world-class companiesrsquo absorption of a large part of the educated workforce has impacted the countryrsquos labor market It has also impacted the startup community The recent downsizing of Intelrsquos operation in Costa Rica in 2014 for example left 1500 highly trained and skilled employees facing the choice of either seeking employment or starting their own company Many chose the latter In this sense several interviewees reported that multinational training programs are raising the skills of the workforce and that these skills could later serve the creation of local companies

Others however do not view the effects of multinationals as positive for the startup ecosystem With vast resources benefits and perks many of these large companies are talent magnets leaving local startups in a tough position to compete for the talent they need This also creates distortions in the labor market where the demand for profiles such as developers with a university degree by far exceeds the supply raising wages to a level that no startup could dream of competing with

2

In response some local startups like Huli have adapted their talent attraction strategy by focusing on professionals who have the ldquoentrepreneurial sparkrdquo and who favor a more creative relaxed and horizontal environment in which contributions are heard and bureaucracy is low

For entrepreneurs the talent wars between multinationals and startups means an increase in the cost of starting a venture With a higher cost of opportunity many find it harder to turn away a dependable salary for the relative uncertainty of startup

LACK OF SAVING AND INVESTMENT CULTURE

bull Saving habits and the cash to get startedbull What people do with excess cash

According to 2014 report from the World Bank Costa Rica has one of the lowest rates of savings (represented as of GDP) in the nations for which there is data Costa Ricans not only lag behind developed nations in their savings habits but also Latin American countries such as Mexico Chile Argentina Colombia Nicaragua Uruguay and Bolivia In very broad terms if the majority of the population is unaccustomed to saving entrepreneurs are less likely to have startup capital of their own and the availability of

ldquoCosta Rica has many

advantages We are the

perfect laboratory to

generate innovation-based

startups because technical

education is good adoption

of technology is high and

we are a very horizontal

society This helps a lot

in developing and testing

business models that you

can later scalerdquo

- Juan Carlos Martiacute CIE TEC

2 During an informal consultation to several software startups they reported the

rapid expansion of international firms in Costa Rica had raised senior developer wages ranging from $4000 to as high as $8000 per month

Cultu

re

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

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Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

eNtrepreN

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 13: Costa Rica Startup Ecosystem Mapping 2016

24 25

ldquoRed tape is one of the main obstacles to start companies Just obtaining a patent or health permit registering with social security (CCSS) or opening a bank account requires huge amounts of effort This forces many entrepreneurs to remain informalrdquo - Claudio Pinto Fairplay Labs

ldquocasualrdquo investors that comprise the friends and family category will also be low In more developed ecosystems the low capital requirements of very early stage ventures are usually covered by savings either from the founder or his close circle While the investment supply is clearly influenced by many factors other than saving habits (see Funding) these habits serve as a foundation for many others

Even among individuals or families with excess capital that they could potentially invest in a new company there is not a widespread culture of investment In other countries like the United States where there is an active stock market the general public is familiar with the concept of investing either through passive vehicles such as pension plans (401Krsquos) or through more active ones such as stock trading In Costa Rica although it is possible to invest via the Mercado de Valores it is not a common practice among the general public Individuals with excess capital usually keep it in very safe instruments such as bank bonds or in saving accounts

strong cultural bias toward socially-MINDED BUSINESSES

bull The social appealbull Making money while creating impactbull Organizations with a social focus

Several interviewees pointed out that an unusually high number of initiatives in the Costa Rican startup ecosystem favor social or environmental causes Events such as Startup Weekend for example usually geared toward the younger generations of aspiring entrepreneurs see many projects that are social in nature

This apparent socialenvironmental inclination could favor the development of social entrepreneurship initiatives and impact investment funds both of which are still nascent in the region According to organizations that promote the field one of the main challenges is to create truly profitable business

models that generate both social and economic value Many of these initial projects focus extensively on their socialenvironmental impact while neglecting revenue or profitability making them more similar to NGOs

Organizations like VIVA focus their knowledge-sharing platform workshops and competition (the Stephan Schmidheiny Awards) on ventures that prove to have social and environmental impacts Social Shot is another initiative that specifically targets social entrepreneurs and has been growing in attendance and reach This shows the significant interest that local entrepreneurs have in these types of venture

opportunities to develop startup-FRIENDLY REGULATION

bull The ease of doing business in Costa Ricabull The dilemma of informality

A nearly unanimous view from both entrepreneurs and supporting organizations is the perceived difficulty to comply with all of the regulations associated with starting a business expressing that it is usually a time consuming endeavor that includes numerous forms complicated requirements and long lines

Despite this perception Costa Rica has been gaining ground according to the Ease of Doing Business Index which showed the country in 58th place in its latest ranking compared to 79th place the previous year Ease of obtaining credit and paying taxes are identified as the major improvements

However aggregate measures such as the ease of doing business index might not be painting the whole picture particularly in the case of startups As interviewees reported the main problems lie in the fact that startups are expected to comply with the same regulations and sometimes even the same fees as much larger companies This causes many startups to work informally while trying to become sustainable

Cultu

re

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 14: Costa Rica Startup Ecosystem Mapping 2016

26 27

27

The Startup Community

b FINDINGS

THE STARTUP COMMUNITY The startup community is comprised of entrepreneurs mentors incubators and programs entrepreneurship-related events and competitions universities and research centers accelerators investors and firms that provide services to starting companies Although individually each actor plays a role in this section we focus on systemic issues and how cultural traits have determined the way these players interact one another and the challenges they have had as a community

the sMe ndash startup distinction

bull How they are differentbull Why the difference matters

As the startup community develops and new initiatives to help entrepreneurs join in there is a rising discussion on what constitutes a startup and what should be considered a traditional small or medium sized enterprise or SME This distinction comes in handy for government programs that try to address the needs of both types of companies with the same instruments or incubators attempting to define their value proposition and target audiences

As observed in our interviews the general understanding is that SMEs are traditional businesses such as bakeries retail shops artisan groups or small restaurants usually run by the owners or their families These businesses are asset intensive as they often need to purchase some sort of equipment and begin producing income as soon as they open Their growth can vary but is usually organic as they are competing in very crowded industriesmdashsometimes against very big players The so-called subsistence startups or one-person businesses also fall under this category

The term ldquostartuprdquo is used locally to refer to innovation-based businesses with the potential for fast growth and scalability in global markets Startups donrsquot always need a lot of assets but instead rely on knowledge and technology Their revenue models donrsquot always generate income immediately but network effects rapid adoption and global reach can make their growth exponential They are often cash hungry and have longer return horizons on investments

While from the broad perspective of entrepreneurship we consider both startups and SMEs to be included itrsquos clear that the

COM

Mu

NItY

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 15: Costa Rica Startup Ecosystem Mapping 2016

28 29

Mentorship opportunities also stem from personal relationships however many organizations are already doing a decent job of providing access to these types of people making the personal network less relevant when seeking a mentor After all itrsquos easier for a person to donate their time to provide feedback on a new venture than it is to invest $10000 in seed capital

INDIVIDUAL INITIATIVES DONrsquoT ALWAYS FIT WELL TOGETHER

bull Chiefs of small tribesbull The lack of a collective memorybull Repeated efforts diluted impactbull The competitive dynamics between organizations

This studyrsquos mapping effort revealed nearly 50 organizations or initiatives that are participating in Costa Ricarsquos startup ecosystem in one way or another (consult the full map of actors at wwwemprendimientocr) A remarkable characteristic however is the degree to which these organizations work in isolation As discussed in the section Costa Rican Culture the culturally-rooted tendency toward low trust and low collaboration perceived about entrepreneurs can also be noticed among programs incubators accelerators and event organizers

This lack of coordination is clear in the fact that actors at different stages in the startup pipeline fail to recognize or address one otherrsquos criteria for supporting startups Early stage incubators and programs that could be feeding growth stage accelerators or investment clubs are missing the opportunity to create a smooth transition for entrepreneurs partially due to the fact that they are working independently

from one another Often entrepreneurs that finish early stage programs find themselves in a sort of ldquono manrsquos landrdquo not being accepted by later stage organizations nor finding the right financial support to continue growing

Indeed each organization seems to have been evolving and improving in their offering to entrepreneurs over the last five years However each is doing so through its own internal processes and experiences A troubling implication for organizations working in isolation is that there is no possibility of benefiting from the experience of others in a way that allows the community to learn from its collective mistakes This unspoken mistrust prevents many entrepreneurs from seeking advice or asking fellow organizations for help even in circumstances where it would make sense

Another example of the lack of coordinated efforts is the fact that various events are often organized on the same day competing for a reduced audience and diluting the impact that each might have on the community as a whole

Though there may not be much money to be made in helping emerging entrepreneurs the dynamics through which these organizations relate to one another are those of a highly competitive business environment There is little if any sharing of practices communication channels or lessons learned While in some cases organizations do compete for scarce resources or funding (see Organizations and their sustainability) it doesnrsquot seem to be the only factor in playmdashsince these opportunities donrsquot come by often

If the motivation isnrsquot financial then why arenrsquot organizations reaching out in search for help or at the very least to coordinate efforts There is

ldquoTherersquos not a memoir that allows us to learn from what has worked in the past and

what hasnrsquot Thatrsquos why we keep making the same mistakesrdquo - Tomaacutes de Camino co-founder

of the Foundation Costa Rica for Innovation

requirements growth potential and the support needed are very different and a clear distinction should be made in order to better serve each

Based on our interviews the local startup community tends to favor startups or innovation-based businesses in competitions incubation processes and events and entrepreneurs are encouraged to think beyond the notion of SMEs

For the purposes of this report the term ldquoentrepreneurrdquo is used to describe the person who starts any type of business While the term ldquocompanyrdquo is used in the broad sense including both the term ldquostartuprdquo is used specifically to describe an innovation-based business

THE ldquoWHOrdquo BEFORE THE ldquoWHATrdquo

bull The project or the entrepreneurbull The limitation culture imposes on imported modelsbull Vital personal networks

Business in Costa Rica as in other Latin American cultures is based on relationships The boundaries between the personal and the professional realms are often blurry and in general there is a concerted effort to get to know the person yoursquore conducting business with In contrast with cultures that focus on the project (ldquothe whatrdquo) Costa Ricans tend to focus on the person (ldquothe who)rdquo)

In one interview the director of a local incubator shared how he had to modify his model which had initially been based on

principles he had seen in Silicon Valley precisely because of this difference ldquoThey were based on projectsrdquo he explained ldquoBut for the local culture whatrsquos important is whorsquos behind the projectrdquo He had concluded that for the local ecosystem the value chain does not start with the product but rather with the person In the resulting methodology the incubator essentially tries to understand ldquowho the jockey is before betting on the horserdquo

In this context personal networksmdashor access to the right people with relative easemdashbecomes crucial to make things happen In the case of the Costa Rican startup ecosystem where organizations are still developing and figuring out how to connect and work together our research says that who you know plays a bigger role in a startuprsquos success than what you know

In the face of the countryrsquos virtually non-existent venture capital industry and scattered angel investors who work individually (see Funding) personal networks make the difference between entrepreneurs who get several rounds of funding and those who are unable to raise enough seed money to get started When institutions do not yet act as matchmakers between potential investors and entrepreneurs personal trust-based relationships fill in as a catalyst for funding

Of the nine entrepreneurs interviewed eight had received funding Of these six had accessed it through personal connections This shows that at the earliest stages when risk and uncertainty are highest a contact list of people who trust you is the most viable alternative

ldquoI see good individual efforts but they are not very collaborative Each one seems to prefer to be the chief of a very small triberdquo- Carlos Mora de la Orden Capitalescom

COM

Mu

NItY

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

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32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

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34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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Mu

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

G

64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 16: Costa Rica Startup Ecosystem Mapping 2016

30 31

entrepreneurs interviewed reported having gone through three or more incubation processes when starting their companies partly because of the lack of clarity regarding how each could helpmdashso they just applied to find out While arguably each experience yields lessons the years spent learning how to start a business may be getting in the way of these entrepreneurs actually starting one

ORGANIzATIONS AND THEIR SUSTAINABILITY

bull The funding of an incubator in the absence of seed capitalbull Government supportbull Links with academia and larger organizationsbull Short-term thinking survival mode

Perhaps the most pressing challenge facing supporting organizations such as incubators accelerators programs and events is the need to become financially sustainable Because early stage investment is not yet a common source of funding (see The Gap Seed or early stage funding) incubators have been unable to rely on a model commonly used in other ecosystems in which the organization invests in the entrepreneur and gets a return once the startup is funded

Charging entrepreneurs for their services has not been a widely used practice mostly because it is assumed that entrepreneurs wonrsquot have enough resources coming out of the gate to pay for the support they need Some organizations however such as the Founder Institute operate under the premise that if entrepreneurs are unable to pay a small fee for a startup launch program they wonrsquot likely be able to incorporate their business and face the expenses associated with founding a company (For costs associated with every available program see the mapping at wwwemprendimientocr )

Unlike other Latin American countries such as Chile government funding has never been a constant source of funding for organizations in Costa Rica The only recent exception being a period between 2013 and 2014 during which the program Capital Semilla of the Banca de Desarrollo initiative created a source

of revenue for incubators which helped some of them in their initial years Under the program each incubator would nominate startups to be funded for amounts up to $100000 If selected the organization would be able to keep a small percentage of the funds opening up a revenue stream for many starting incubators However the program was halted after two iterations (see Government money) leaving many organizations without a significant source of income This has forced many to reinvent their business model and explore new ways to finance themselves

Incubators stemming from public universities often receive their support in the form of staff facilities and in some cases seed money for incubated startups However this type of assistance is limited which drives them to find self-sustaining models that provide financial independence While the services of some incubators remain free to the entrepreneur as in the case of UNA Emprendedores other institutions like UCRrsquos AUGE have begun to experiment with a tier-pricing model in which students are charged (if anything) less than working professionals who can afford to pay for the services

In a scenario where incubators and early stage programs remain reluctant to charge entrepreneurs government or institutional economic assistance continues to be scarce and seed investment canrsquot provide a return their economic sustainability is fragile This forces them to operate in an extremely lean manner with small staffs and limited resources

This situation also leads to short-term thinking in terms of their relationships with other actors of the ecosystem and to some extent to view these actors as competition for the limited resources available As an example one interviewee stated that she had contacted an organization to express interest in merging their individual projects to create a joint one The subject of funding was the first to come up and when she told the contact that she had secured some funds he quickly steered the conversation towards his organization selling its services to hers Sensing more interest in the short-term gain of accessing funds than in

Many are trying to do the same thing and we are not linking

our initiatives together In our case for example we prefer to

concentrate on generating more deal flow our most important role

in the ecosystem rather than try to build an investment networkrdquo

Luis Alonso Jimeacutenez Auge

little consensus on the answer to this question Some point to ego-driven personalities that want to be in the spotlight while they triumph over others Other interviewees suggest itrsquos merely that each organization believes too strongly in its own ldquosecret reciperdquo and therefore isnrsquot interested in listening to or

sharing its formula for success with othersThe undifferentiated and in some cases extensive supply of options within the startup ecosystem causes confusion among aspiring entrepreneurs who have difficulty understanding what each organization aims to do and how they can help Many of the

ldquoIncubators or accelerators should be more open if therersquos a

workshop or course entrepreneurs from other organizations

should be invited too Allowing others to see how they do

things and share those practices helps everybody because you

incorporate different points of viewrdquo - Juan Joseacute Muntildeoz Open Future POOM

COM

Mu

NItY

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

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36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

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Mu

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38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

StArtu

pS

52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 17: Costa Rica Startup Ecosystem Mapping 2016

32 33

Interviewees found it extremely hard to estimate this number however it was widely conceded that it couldnrsquot be more than 500 Even if this is the amount of startups launched last year it would put Costa Ricarsquos startup density at around 104

It is then possible to argue that although some of the perceived lack of quality of Costa Rican startups might be due to inexperience itrsquos clear that there are not enough initiativesmdashboth in absolute terms due to the size of the market and (particularly) in terms of startup density Simply put very few startups are launched each year

A low volume of projects has many implications First although all programs and incubators have selection processes the lack of volume in applications could in some cases force the bar down This drives the organization to devote already scarce resources to startups that might not be ready or might not result in anything scalable This in turn keeps them from striking the success that drives credibility and gains them further

support Second the low volume of startups means a low demand for service providers who could eventually support young companies making a resource base difficult to develop In more mature ecosystems the resource base that serves startups has surged from the aggregated demand that comes with scale

Few organizations are in a position to address the so-called critical mass problem since itrsquos necessary to start early onmdashas early as school Developing an entrepreneurial mindset from an early age is what organizations like the Ministry of Science Technology and Telecommunications (MICITT) are trying to do by working with young people to encourage them to consider entrepreneurship as a viable professional option These efforts are obviously long term but are indispensable for feeding the top of the funnel

ldquoBecause most organizations depend on the same limited pool government grants to survive

they spend more time trying to secure those funds for themselves than working to prove that they can really provide value to the startups in the ecosystem and prove their reasons to exist Therefore sustainability of most actors is very fragile anyone can disappear at any momentrdquo

- Allan Boruchowicz Carao Ventures

true collaboration the idea was abandoned and both went their separate ways Examples like this one show that the pressing economic challenges might be tied to the factors inhibiting long-term sustained collaboration within the startup community

THE CRITICAL MASS PROBLEM

bull Small markets and economies of scalebull A matter of numbersbull On startup densitybull The problem with low volumesbull How to feed the top of the pipeline

Costa Rica is a fairly small market With just 48 million inhabitants reaching economies of scale is a challenge for any industry According to our research the development of the countryrsquos innovation and startup creation capacity is largely influenced by scale

Entrepreneurs policy makers and directors of incubators agree that generally speaking projects donrsquot seem to be at the desired level of quality A common theme during the interviews was that ldquothere arenrsquot enough good projectsrdquo This could be a quality issue in which inexperienced entrepreneurs are still learning and figuring out how to create good scalable startups Or it could simply be as many interviewees suggested a matter of numbers Statistically there simply may not be enough startups to produce a super star

Just as a reference the startup density (the number of startups per 100000 people) in the United States reached 1306 according to the 2015 Kauffman Index of Startup Activity While no one is tracking national-level statistics for Costa Rica a good indicator of the number of startups created is the aggregate number of projects that go through available support programs incubators and acceleration processes

COM

Mu

NItY

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

COM

Mu

NItY

36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

COM

Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 18: Costa Rica Startup Ecosystem Mapping 2016

34 35

were also mentioned as shortcomings of many events In most cases there is a guest speaker usually an entrepreneur who shares his or her story with the audience Open mics afterwards very seldom attract participants so attendants end up playing a passive role and being only mildly engaged Arguably this impacts retentionmdashthe prerequisite for community development One possible solution posed by the interviewees was to design the events in a way that is less focused on listening to one person and more about sharing experiences in a horizontal format Much like workshops events can encourage participants to be part of the experience ensuring that they are participant rather than speaker focused

STARTUP COMPETITIONS AND THEIR ROLE IN PROVIDING VISIBILITY AND ACCESS TO RESOURCES

bull A showcase for startups bull An inefficient source of fundingbull Validation and credibility

In the same way that events have been sprouting up in recent years startup competitions have also increased in number Of the six competitions identified in the current mapping five had their first edition in the past two years alone

According to our interviewees competitions currently serve several purposes First they help create awareness about entrepreneurship among the general public which pushes the entire ecosystem forward by engaging more people in the subject By making startups visible aspiring entrepreneurs can find inspiration role models or simply the validation that starting a business is a viable option This visibility also helps engage other stakeholders who are usually not involved in the ecosystem such as private companies which are taking notes and finding ways to either contribute to the ecosystem through sponsorships or to incorporate innovation and entrepreneurship into their own programs

The second purpose is that of becoming a proxy for resources Many of the entrepreneurs interviewed were lured to participate in several competitions by the possibility of winning the first price usually a modest amount that could be used as seed money But competitions are an inefficient funding source as the prizes offered by local organizations are typically not more than a few thousand dollars and those with an international reach and larger prizes usually require several qualifying rounds and regional competitions before the award is grantedmdasha process that could stretch in months and take away lots of time and focus

However competitions could serve another purpose which is to provide validation and gain credibility Winning a competition even if no monetary prize is involved can help entrepreneurs build their case in front of investors accelerators or organizations abroad In addition the media exposure can put them in the map for consumers and potential partners

One of the pioneers in competitions in the Costa Rican ecosystem is Yo Emprendedor Since its beginnings in 2008 it has reportedly analyzed 1400 business opportunities and trained up to 950 entrepreneurs

COWORKING SPACES

bull Permanent cross-pollination bull A new concept in Costa Ricabull The sustainability challenge

Just as events serve the purpose of creating connections between people from different backgrounds and skill sets (see Entrepreneurship events and the effects of cross-pollination) coworking spaces provide the same opportunity in a more continual manner Whereas events come and go and are usually centered around a specific topic these collaborative spaces create a permanent environment for entrepreneurs to meet and share ideas Though still scarce in Costa Rica organizations like Impactico are betting on the effects of collaborative spaces in bringing actors of the ecosystem closer together and creating

ldquoWe need a critical mass of innovative startups to spark things up However it is not only a matter of encouraging people to take the leap and become an entrepreneur it is also about pointing them to the right resources and guiding them in the processrdquo

- David Bulloacuten Director of Innovation MICITT

ENTREPRENEURSHIP EVENTS AND THE effects of cross-pollination

bull More events more discussion about entrepreneurship bull Same old group of buddiesbull The value of consistencybull Engagement and participation as a path to retention

Every startup ecosystem event fulfills the very specific and important role of cross-pollination bringing different people together around their interest in entrepreneurship The rationale is that people with different profilesmdashdesigners business administrators engineers developers and othersmdashrarely have common spaces where they can meet and share ideas These events create opportunities to find inspiration and meet people to collaborate with

Events in the Costa Rican ecosystem vary in focus and format As entrepreneurship becomes more mainstream in the country however they have undoubtedly been growing in number as well as in audience reached Nine events were launched in the last two years alone with expectations of becoming periodical (for a complete list see the map with all actors at wwwemprendimientocr)

Despite the great things that events accomplish by bringing the entrepreneurial agenda to the public many interviewees agreed that these

efforts show a lack of diversity Perhaps due to the combination of low critical mass and the isolation and disconnection under which most organizers operate many end up hosting the same group of people While this could be serving to strengthen the grouprsquos commitment and identity it impacts diversity As with other factors the affiliation criteria for joining events seems to revolve around familiarity and friendship more than the purpose of meeting new people

There are however other perspectives on the impact that events are having on the ecosystem For another interviewee the value should not necessarily be measured by the number or type of attendants but in terms of continuity and consistency In this sense initiatives that have been around the longest such as First Tuesday have carved out a space precisely because of their continuity and their underlying community the meetup channel chepetec is one of the largest in the country

An initiative launched in 2015 called Story Tellers bets on a format that invites all kinds of professionalsmdashfrom entrepreneurs to chefs from corporate employees to actorsmdashto share their stories and inspire others With storytelling at its core the program not only seeks to entertain and connect people but also to spread the entrepreneurial mindset

A lack of structure and a low level of participation

COM

Mu

NItY

36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

COM

Mu

NItY

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

COM

Mu

NItY

42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

NItY

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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DIN

G

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

FuN

DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 19: Costa Rica Startup Ecosystem Mapping 2016

36 37

transparently the transactional nature of the approach reduces the possibility of building a trust-based relationship Entrepreneurs sometimes fearing that a more experienced business person will take advantage of them pass on the offer resulting in both parties missing out on the opportunity to work together

RESOURCE BASE SERVICE PROVIDERS CANrsquoT ALWAYS ADEqUATELY SERVE STARTUPS

bull The different needs of startupsbull Pro-bono and the exchange of servicesbull Equity-based compensationbull The problem services paid by government funds

A significant determinant for how hard it is for entrepreneurs to launch a business is the resource base they have access to Every startup needs legal accounting graphic design web development banking payment processing social media management and other services However these young companies often canrsquot access these services if the providers donrsquot adapt their offerings to startups specific needs In Costa Rica incorporating a new business can cost entrepreneurs anywhere from $500 to $1500 depending on the firm they hire Intellectual property advisory one of the most relevant services when developing a new product or technology can cost thousands of dollars While there are currently no legal firms specializing in startups there are examples of

firms that have begun to serve this segment by tailoring their offerings making them more accessible to entrepreneurs Arias amp Muntildeoz for example has partnered with local research centers and incubators to provide intellectual property advisory to startups Sfera legal has partnered with programs such as the Founder Institute to provide participants with cost-effective legal assistance

In the case of services such as graphic design web development social media and communication there are many options for entrepreneurs since in these fields itrsquos common to find young professionals who not only better understand the startup reality but in some cases are entrepreneurs themselves It is common to see pro-bono work or the exchange of services with little or no money involved In addition an abundant talent pool makes it fairly easy to find professionals willing to donate their time to be part of a startup or to freelance for a small fee

Payment processing banking and other financial services are probably the least in touch with the needs of a startup Numerous requisites time consuming processes and most of all difficulties in processing online payments have driven local entrepreneurs toward global solutions such as Stripe and PayPal

In an effort to make costly services more accessible to entrepreneurs some firms have explored models seen in other ecosystems in which the company works for equity participation rather than upfront compensation This has had

synergies Coworking spaces aim to resolve two important needs of entrepreneurs and independent professionals first that of having an office-like space in which to work and meet clients without the overhead of actually leasing a place and paying utilities and second to connect with the community meet other like-minded people and be part of events and other activities This second aspect of the value of coworking spaces is often overlooked and there have been precedents of organizations that default to desk rental simply because they do not provide their customers enough connections to the startup community and thus fail to become a relevant space in the ecosystem

While in other cities around the world coworking spaces have been present for over a decade the concept is fairly new for Costa Rica which gives pioneers the task of educating potential customers on the advantages of the model Like any other industry this requires resources whether in terms of time or marketing budgets This is hard enough for any entrepreneur but even more so for a coworking space founder facing high investments in fixed assets such as furniture and equipment to run the place

This leads to similar sustainability challenges as those faced by incubators In the case of coworking spaces there is no issue with charging customers for their services but there might be still less demand than that required to sustain an asset-intensive and capital-consuming business Diversifying beyond space rental is a strategy that other coworking spaces have tried particularly in Latin America where the environment is similar to that of Costa Rica Offering workshops targeting private companies seminars and services required by startups such as accounting social media

management and others have been common revenue streams to supplement the model

MENTORS AND THEIR SUPPORTING ROLE

bull Mentors as connectorsbull Giving first

A vital part of every startup ecosystem mentors are traditionally experienced entrepreneurs who openly share their lessons and contacts and with less experienced ones usually for the sole interest of helping out

Mentors however can be hard to come by for an entrepreneur who is just getting started and has not yet developed connections within the community In Costa Rica not all programs or incubators incorporate the participation of mentors so proactivity and growing your personal network is step one in finding a good mentor

One program that focuses strongly on connecting entrepreneurs with mentors is the Founder Institute Its local network is comprised of 40+ mentors that donate their time to listen and provide feedback to the entrepreneurs who join their program Often these connections generate further value in the form of continued mentorship the acquisition of new customers and in some cases joint ventures

Although the interviewees reported that most mentors assume the role selflessly in the spirit of helping entrepreneurs there are cases where prospective mentors approach startups with the promise of investing or looking to get a good deal on the young companyrsquos equity While this is not necessarily a problem if handled

ldquoOur resource base for startups is still weak We lack companies willing to work under conditions that are aligned with the startupsrsquo needs and development stage such as lower entry prices equity or stock options deals etc Accessible tools and software are not widely knownrdquo - Allan Boruchowicz Carao Ventures

COM

Mu

NItY

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

COM

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

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44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

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50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 20: Costa Rica Startup Ecosystem Mapping 2016

38 39

mixed results the main challenge being the reluctance of local entrepreneurs to concede equity even at stages when the business is not yet in place (see On sharing risk and equityhellip)

Other strategies include partnering with assistance programs or grants in which the company providing the service is paid by a third party usually a government institution The main criticism for this model is that it creates incentives for professionals to go after the funds rather than focusing on creating value for the young company According to one interviewee this breeds all sorts of opportunistic ldquoexpertsrdquo in entrepreneurship innovation and business development which end up hurting the startup community by focusing on the short-term gains

CONNECTORS MINDING THE GAP BETWEEN ENTREPRENEURS AND INVESTORS

bull Unfamiliar territory for bothbull The function of matching expectationsbull Trust by proxy

Almost unanimously the interviewees agreed that venture capital for startups is still in its early stages in Costa Rica Though there are enough wealthy individuals and families with the potential to become investors the deals especially at an early stage arenrsquot happening (see Scattered angels) As reported by the interviewees most prospective investors come from family businesses and traditional industries and are not very familiar with the valuation methods accustomed equity demands and investment horizons associated with startups

Entrepreneurs still have little understanding of the dynamics of investing and what investors are looking for (see Lack of understanding about private investment) Although best practices from foreign ecosystems are widely

available online few entrepreneurs take the time to learn how to handle a round of angel or seed investments or even define their funding strategy The few that do have the task of sharing what theyrsquove learned with potential investors as it is still uncharted territory

To bridge the gap of unmet expectations and the lack of investment knowledge some actors in the local ecosystem have begun to fulfill an intermediation role seeking to educate both sides in order to match investors and entrepreneurs Investment clubs tied with accelerators are the clearest example of such organizations though individuals with connections on both sides of the investment market also perform this role

Successfully gathering a group of investors around a club while also supporting startups that are prospects for funding accelerators such as Carao Ventures have been among the first in the ecosystem to help overcome the local gap between investors and entrepreneurs

This role is particularly important during this early stage of the development of venture capital when both investors and entrepreneurs can benefit from a better understanding of how the process works and what the best practices are Trust in this intermediation is often the glue that holds everything together as both sides see the connector as someone who is looking out for them and advocating for their best interests

An important caveat is that though we call this process intermediation it doesnrsquot follow a strictly transactional logic and although individual connectors in some instances do benefit financially from their role most often opportunities to connect parties are more circumstantial and relationship based than a deliberate attempt to profit

ldquoLocally processing payments is too complicated and there are

only a handful of options We had to incorporate the company in the United States so we could process payments using Stripe

That means we eventually have to report income in the US and pay

taxes on itrdquo

- Vinicio Chanto Slidebean

ldquoWe are lacking more connectors people that can bring together investors and entrepreneursrdquo - Juan Carlos Martiacute CIE TEC

COM

Mu

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40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

COM

Mu

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42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

NItY

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

eNtrepreN

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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DIN

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 21: Costa Rica Startup Ecosystem Mapping 2016

40 41

REINVENTING THE WHEEL A LACK OF CONNECTION WITH MORE DEVELOPED ECOSYSTEMS

bull The bridges to US ecosystemsbull Craft solutionsbull The few that have been outbull The knowledge transfer function

As discussed above actors in the startup ecosystemmdashboth entrepreneurs and supporting organizationsmdashseem to be operating in individually with little opportunity to learn from one anotherrsquos best practices and experiences This also seems to apply at a macro level in which local actors (with a few exceptions) donrsquot consider experiences from other ecosystems as a source of knowledge

Opportunities to connect to more mature ecosystems can be driven by the same factors that attract many multinationals to Costa Rica including its cultural and geographical proximity to the United States the prevalence of English and the high adoption of technology These can serve as bridges to ecosystems in the US cities

Of course every ecosystem develops under its own determinants and conditions and culture plays a significant role in how stakeholders interact However there is much to be learned from the experiences of other startup communities around the world even if they donrsquot share the same characteristics on the surface These ldquobest practicesrdquo can save entrepreneurs and organizations significant time and resources by helping them figure things out more quickly According to one local entrepreneur we interviewed the value of learning from the experience of others was one of the most important lessons acquired in the four years

since launching his startup ldquoWersquove made a lot of mistakes along the way If people with more experience had showed us the ropes we wouldnrsquot have received so many punches That would have saved us a lot of resources particularly timerdquo Now he makes a habit of connecting with other startups locally and abroad to constantly seek feedback share experiences and learn from them

In spite of this so far there are examples of startups like Slidebean Junar and Leaf that have successfully connected to accelerators or investment in US and UK startup ecosystems In the case of Slidebean the team has participated in Startup Chile Dreamit Ventures in New York City and 500 Startups in Silicon Valley and the experience according to Vinicio Chanto allowed them to find their path to growth

THE ELUSIVE SUCCESS STORY A PRECEDENT THE COMMUNITY IS WAITING FOR

bull In search for the Costa Rican Wazebull Startup purists and the success stories of the 90rsquosbull The Keylor Navas effectbull A home run for investors

The elusive success story that could provide inspiration for entrepreneurs and earn startups credibility among investors is according to many interviewees yet to come Whether this is due to the historically low profile of many successful entrepreneurs the limited media coverage the topic has received or the lack of concrete success stories the truth is that the community is unable to identify a Costa Rican equivalent of Uber Waze or Spotify as an example of local startup pedigree

There have indeed been successful Costa Rican startups in recent decades but the low visibility discussed above has kept these cases largely unknown to the general public Some argue that while entrepreneurs from previous generations did successfully create grow and sell their companies they werenrsquot necessarily ldquostartupsrdquo in the strict sense of the word One interviewee described a crucial distinction between software companies that perform outsourced work for developed markets and startups which develop their own products While the former is essentially a service provided at a lower cost the latter gains its competitive advantage from innovation and actually resolving a problem If you agree with this distinction then you likely feel that no ldquosuperstarrdquo

startups have emerged from the local ecosystem However several founders of local companies have undoubtedly made millions upon exit In any case neither startups nor more traditional companies have been visible enough to become the success story everyone aspires to

For entrepreneurs the precedent of a startup that made it big isnrsquot just a source of inspiration Equally important it is the validation that entrepreneurship hard as it can be does pay off This is particularly significant in the early stages of ecosystem development when starting onersquos own company isnrsquot a career path that many young adults consider Just as Keylor Navas demonstrated that a Costa Rican can play among the best in the world many think a runaway success story from our startup ecosystem is whatrsquos needed to boost the countryrsquos next generation of innovators and entrepreneurs

For investors a success storymdashparticularly if it was funded locallymdashwould be proof that investing in startups pays off The high valuations extended investment horizons and level of risk involved in early stage ventures could be balanced by that one example of an investment that provided outrageous returns A common saying in the venture capital industry is that out of every ten startups an investor chooses six will likely lose money three will more or less break even and one will make up for all the losses Itrsquos one thing however to be familiar with the saying and entirely another to have seen that one ldquohome runrdquo or better yet to know the fellow investor that helped hit it

ldquoMany efforts to support entrepreneurs are lsquocraftrsquo solutions Wersquore attempting to solve local problems that organizations in other ecosystems abroad have already solved successfullyrdquo - Josueacute Fumero

ldquoBecause there are no success cases there is no credibility among investors And if there are they are unknown Parties involved in private transactions donrsquot have any incentive in havingthe deal be known so in the end nobody finds outrdquo - Paul Fervoy Miweb

ldquoParticipating in world class programs is very tough because they challenge at a whole different level While in Costa Rica you might be celebrated for a small achievement over there you are one of the little ones But it is this toughness that allowed us to grow 25X after one of the programsrdquo - Vinicio Chanto Slidebean

COM

Mu

NItY

42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

NItY

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

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3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 22: Costa Rica Startup Ecosystem Mapping 2016

42 43

Some believe that these connections with more mature ecosystems are the key to speed the development of the local one While some incubators like CIE-TEC have bet on learning from foreign ecosystems to reinvent the way they support entrepreneurs locally the main driver of this knowledge transfer is without a doubt the entrepreneurs themselves By focusing not only on helping them to resolving their challenges but also sharing lessons learned these ambassadors could serve as the connectors the local ecosystem needs

AN UMBRELLA ORGANIzATION

bull A united front for lobbying bull A more powerful platform

The disconnection between the actors within the ecosystem and their narrow focus on their specific role limits their ability to see the bigger picture and consider the needs of the community as a whole During policy discussions for example individual members represent the needs of their own organizations rather than acting as a united front As one government official put it as long as the community lacks representation as a community its advocacy and lobbying capacity is virtually nonexistent Here disconnection is truly hurting the ecosystem Being unable to solve the organizational challenge of uniting behind a common agenda the members of the ecosystem limit their influence on public policy Two interviewees pointed out the need for some type of umbrella organization under which stakeholders could discuss the needs of the entire community define a unified agenda and advocate for their interests from a more powerful platform This association (or federation) could provide the political participation currently held by some chambers and finally allow entrepreneurs to influence public policy in a meaningful way for the startup community

ldquoLittle by little we have to connect the few startups that we have with more mature ecosystems so that they can better solve their challenges Ideally these entrepreneurs will be actively involved with the local startup community so they can share some of the best practices they find abroadrdquo - David Bulloacuten Director of Innovation MICITT

COM

Mu

NItY

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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DIN

G

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 23: Costa Rica Startup Ecosystem Mapping 2016

44 45

IDEAL STAGE OF LIFE TO START A COMPANY

bull Launching during your 20rsquos bull The opportunity cost of the 30rsquosbull The advantages of mid-life entrepreneurship

We interviewed entrepreneurs from different age groupsmdashfrom 20-somethings to those well into their 50rsquos and the stage of life had clearly been a key determinant in the decision to start their own company

For young entrepreneurs fresh out of college (or even still studying) the decision to launch a business was not a particularly difficult one Most of the cases reported were still economically dependent on their parents and had few responsibilities making the risk of failing a less costly one The majority of these ventures begin with little or no money and the entrepreneurrsquos lack of experience is often made up for by the support obtained from organizations such as incubators or early stage programs and a lack of experience was somehow compensated by support from organizations that typically serve entrepreneurs who are under 30 years old3 Though unmeasured in Costa Rica worldwide studies have shown the failure rate among young entrepreneurs is commonly higher than for their older counterparts

For those over 30 facing the risks associated

with starting onersquos own business is more difficult as economic needs grow with personal decisions such as marriage buying a home or having children These entrepreneurs also reported that the cost of opportunity was higher In oth gh salary and the comfort it afforded They also however identified many advantages to having started the entrepreneurial journey later on in life Work experience and contacts within the industry for example increased the chances of success Financially via savings or access to credit they were also less dependent than their younger counterparts on external funding

Finally for those entrepreneurs over 45 economic stability had allowed them to better manage risk Here again experience and contacts also seem to have improved their chances of success Within this age bracket however most interviewees reported that they were not ldquofirst-timersrdquo so while they might have started a company in their late 40rsquos or 50rsquos they werenrsquot coming from a situation of regular employment

These trends are of course not unique to the local startup ecosystem The same tendencies can be observed in cities around the world What is particular to this ecosystem however is how the risk of starting a business is handled in the various stages of life in light of the cultural traits described in the section ldquoCosta Rica and its Culturerdquo For instance the decision to start a company is tougher for entrepreneurs who would be walking away from a secure well-paying job particularly when coupled with

THE EMOTIONAL PRICE OF BECOMING AN ENTREPRENEUR

bull The lonely pathbull Being the goalkeeper

Choosing to start a company is without a doubt a life changing decision Leaving the comfort of a stable salary risking your savings and asking others to join you in the adventure without any guarantee that things will work out can have an emotional downside Unlike a demanding job as an entrepreneur you are ultimately responsible for the wellbeing of the company and its team and that can be difficult to handle

As discussed in the section Costa Rican Culture the local society is still relatively unfamiliar with entrepreneurship as a career choice and close networks such as family and friends donrsquot always understand or support the entrepreneur This can make a startup venture feel like a very lonely path

All of the interviewees agreed that although exciting leading a company takes a toll on other areas of their lives Long hours make it difficult to find time for family friends or other activities For three of the entrepreneurs interviewed having a supportive family or spouse makes all the difference and they suggested that negotiating beforehand with loved ones that will be affected by the choice of starting a company should be a top priority

The entrepreneurc FINDINGS When I was an employee there

was also lots of work but it wasnrsquot equally stressful because now Irsquom the goalkeeper With a startup therersquos stress when things are going badly but therersquos also stress when you are growing therersquos always stress What helps me is talk to other entrepreneurs to let off some steamrdquo - Alejandro Brenes Enertiva

eNtrepreN

eur

3 This may have more to do with the fact that most incubators are linked to universities rather than an explicit intention to support young entrepreneurs

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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DIN

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 24: Costa Rica Startup Ecosystem Mapping 2016

46 47

extremely slow progress or simply never getting off the ground because their founders keep waiting for them to grow before quitting their day job This chicken or the egg problem leaves many entrepreneurs with the challenge of balancing their short-term income needs with the time their startup requires At this juncture many entrepreneurs point to angel investment as a workaround As Eric de la Goublaye of the company deLaGuayaba explained ldquoI canrsquot focus 100 on the startup because I keep having to offer services to make some money on the side If I had some funding I wouldnrsquot have to juggle so many things to earn an incomerdquo

An alternative to this resistance to commit full-time to the startup other entrepreneurs advocate for the ldquopart-time as a bridgerdquo strategy The founding team of Slidebean reported that they followed this formula in the early stages of their venture when money was tight and they had not yet raised capital By taking on consultancy projects they were able to ease the pressure of the startup producing sufficient income for them to live on

Another practice mentioned in reference to the dilemma of whether or not to leave your day job is a sort of ldquopre-launch acquisitionrdquo in which the entrepreneur asks a large company to stake the project and develop it in house removing any risk for the founder but completely limiting the upside by turning over control In a few examples provided the entrepreneurs effectively became the companyrsquos employee and the startup idea a product within it This tactic allows the entrepreneur to work on whatever he or she likes without ever taking a risk Many argue however that it only creates value for the acquiring company

ON SHARING RISK AND EqUITY THE LONER PROBLEM

bull The missing co-founderbull The erosion of good will

Our research indicates that paradoxically despite what could be perceived as a healthy dose of risk aversion when it comes to opening up a company to external shareholders local entrepreneurs have a bias towards keeping it to themselves This decision could be influenced by various conditions and may not be simply a matter of preference

Bringing people onboard whether as co-founders or investors is clearly a decision in which trust plays an important role Outlined in the section on Costa Rican Culture low trust leads to low collaboration the cultural tendency towards skepticism and distrust gets in the way of collaborating with potential co-founders and striking deals with potential partners

The investors interviewed reported having met with entrepreneurs who were unwilling to share details about their projects and had given vague responses to questions This of course results in the investors lacking sufficient information to make investment decisions More importantly it stifles the relationship According to our interviewees a defensive attitude resulting from mistrust or framing the encounter as purely transactional renders most of these attempts unsuccessful

Several entrepreneurs on the other hand explained that the main reason why potential investment meetings go awry is because of investorsrsquo outrageous equity demands (see Scattered angels) As with any new

the social implications they could face in the form of skeptical spouses or family members

WHEN TO LEAVE YOUR DAY jOB THE DILEMMA of the part-tiMe entrepreneurship

bull Seeing if it works before jumping inbull Part-time as a bridgebull The corporate safety net

Closely related to the perceived cultural tendency to favor stability through employment (see The path of stability through employment) several interviewees referred to what they felt was a general attitude of local entrepreneurs towards risk Although it is outside the scope of this study to determine whether the risk profile of Costa Ricans is significantly different from that of other nationalities many members of

the community pointed out that very seldom do entrepreneurs in incubators and early stage programs devote to their ventures full time

An example of this dynamic is provided by the Costa Rica chapter of the Founder Institute This program pushes candidates to take the leap from employee to entrepreneur through intense weekly assignments and by requiring them to incorporate their companies in order to graduate Faced with the long hours that conflict with their jobs up to 80 of participants drop out and suspend their startup project

This logic of ldquosee if it works before jumping inrdquo seems to be applied by many entrepreneurs The problem as the director of a local incubator pointed out is that it typically wonrsquot workmdashunless you jump in with sufficient commitment and dedicate enough hours to make it happen As a result many ventures are making

ldquoWe still have many weekend entrepreneurs unwilling to leave their daytime job Fear of failure is a big part of it People want to jump in once they feel is somewhat sure the startup is going to workrdquo - Juan Carlos Martiacute CIE TEC

eNtrepreN

eur

50rsquos20rsquos AGE

+ Responsabilites (family)

+ Financial independence (Savings or credit)

+ Experience

+ Contacts

+ Cost of Opportunity

+ Support fromorganizations

+ Economic Supportfrom family

+ Energy

+ Freedom toexperiment

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

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eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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DIN

G

64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 25: Costa Rica Startup Ecosystem Mapping 2016

48 49

unregulated market there are indeed wealthy individuals who have the resources but may not have the venture capital experience or familiarity with startup valuation methods to come up with realistic equity demands In one case reported in exchange for an early stage investment of $50000 in a software startup the investor demanded 70 of the company Unfortunately offers like this are not rare among individual investors outside of clubs or accelerators The short-term consequences of course are the lost deals In the long term though the erosion of good will among entrepreneurs who feel taken advantage of breeds additional distrust toward investors

Perhaps because of the combined result of a cultural bias toward low trust an unregulated angel investment playing field and bad practices among a few investors not many entrepreneurs are choosing to share the risk and the equity of their companies This makes growth organic and slow and it makes it harder for these entrepreneurs to abandon primary income sources in order to fully devote themselves to their startups

LACK OF UNDERSTANDING ABOUT PRIVATE INVESTMENT

bull Angel investment 101bull Educating investorsbull How to approach investors

Most participants in the community would agree that there are few known examples of startups that have received private investment and the low visibility of such examples makes

it even harder for newcomers to understand what works what doesnrsquot or even what the basics of venture capital are While few local resources are available there are many online references of best practices from other ecosystems such as the Founder Institutersquos Startup Resource Vault and Steve Blankrsquos Startup Tools It is the general perception of incubators accelerators andmdashparticularlymdashinvestors that local entrepreneurs arenrsquot doing the homework of learning how venture capital works what a particular investor might expect and how to value a company in its early stages Coupled with some investorsrsquo rather limited knowledge of the same topics it is difficult for both parties to find common ground (see Scattered angels)

One strategy employed by local startups that have been successful at raising early stage capital is to educate themselves so that they can better share industry practices with potential investors who might not be familiar with them While not every investor is comfortable being ldquoschooledrdquo by a young entrepreneur in cases when the founder has solid credentials or is referred by a trusted source this approach can considerably increase the chances of reaching an agreement

A final recommendation is that entrepreneurs reach out to the countryrsquos (albeit few) investment clubs and accelerators in search of best practices and how to get started when looking for capital Carao Ventures for example shares best practices on how to approach investors

ldquoMany entrepreneurs are looking for funding but arenrsquot yet ready for it This causes a lot of noise in the ecosystem and makes it more difficult for everyone else because it lowers entrepreneursrsquo credibility in front of investorsrdquo

- Eric de la Goublaye De la Guayaba

ldquoWhen we started to seek funding the first thing we did when approaching investors was to explain how startups work and how they are valued In order to do this we first had to educate ourselvesrdquo - Alejandro Vega Huli

eNtrepreN

eur

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

StArtu

pS

52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 26: Costa Rica Startup Ecosystem Mapping 2016

50 51

the story of a startup that had traditionally shown difficulties convincing its managers (friends and family) to demand accountability of one another or their teams While the companyrsquos culture was as expectedmdashextremely positive since everyone got alongmdashthis same feel-good environment had prevented management from confronting employees when performance was low

As one foreign investor observed the challenge of finding the right team isnrsquot just a function of the founderrsquos inclination towards family and friends After having mentored several entrepreneurs this investor realized that even when founders recognize the need to fill the gaps in their team itrsquos difficult to locate them as local networks are still forming ldquoSay you need a good business development guy Where do you look LinkedInrdquo Large corporations often dominate regular job sites and although working for a startup is becoming more appealing a large majority of job seekers are drawn to safe stable positions with multinationals or the government

One possible solution to the challenge of finding the right talent within the flexible conditions required by a startup is to foster more connections within the existing participants of the ecosystem beyond monthly events Currently there seems to be little interaction between members of different organizations which has limited the possibility of both knowledge sharing and service exchange Creating common spaces for entrepreneurs and freelancers to meet

on a regular basismdashwhether via physical coworking spaces or online platformsmdashcould generate enough scale to facilitate more effective match making

Building networks (or further connecting existing ones) so that people can share ideas locate potential partners and hire the talent they need is viewed as a logical step in the development of a startup ecosystem Again visibility of one anotherrsquos abilities services and lessons learned along with best practices is the key to collective learning and the creation of value for the entire community

THE qUEST FOR A BUSINESS MODEL HOW TO TURN AN IDEA INTO A COMPANY

bull The idea that doesnrsquot sellbull Overlooking the business component of the businessbull Incubator support as a startbull Profitable social ventures

Ideas by themselves are of little value They only become valuable when paired with a way of monetizing them by bringing them to the market This process is arguably the largest challenge faced by local startups according to our interviewees

In early stage programs or during the first phases of incubation processes many young entrepreneurs enthusiastically pursue a great idea with little regard for market demand competition production costs and scalability

Once a company is founded chances are that a co-founder or a team of staff will join the entrepreneur At this moment the startup begins to have unique challenges of its ownmdashfrom securing the required talent to finding its path to its first sales and growth In this section we will cover what our research revealed regarding the difficulties and opportunities faced by these young companies

STEP ONE BUILDING THE TEAM

bull A top reason for startup failurebull Two engineers no business personbull The upside of friendship in company culturebull The no-accountability trapbull Creating shared spaces to meet talent

ldquoBuilding the teamrdquo is frequently mentioned as one of the most important steps of starting a company In fact it is considered the top reason for startup failure after a lack of market need and running out of cash According to many of the interviewed members of the startup community entrepreneurs often overlook this component

In relationship building trust is king As previously discussed (see Low trust leads to low collaboration) however it seems to be a scarce resource in the local ecosystem Entrepreneurs usually turn to friends or family when looking for co-founders and employees This isnrsquot necessarily unique of

the local community as it is seen in many other examples around the world What might be distinctive in low-trust societies though is the over reliance on this pool as a source for partners and employees

This has many pros and cons that impact the dynamics of the company The first implication is that the teams are often smallmdashone or two friends rarely more than three Second they usually come from similar knowledge backgrounds as close relationships often begin in environments such as university or work Combined these characteristics often result in unbalanced teams that donrsquot cover the basics in terms of talent requirements there might be two technical people and no business person or two science majors and no one who knows about sales and marketing

As a positively viewed implication the camaraderie that comes with friendship makes it easy (and fun) for these co-founders to work together and the mutual trust facilitates shared responsibilities and splitting the equity Two entrepreneurs reported that the fact that their co-founder was a close friend had allowed them to stick together through the tough first months

However despite this positive atmosphere teaming up with family and friends can create challenges in terms of the definition of roles and accountability as the dynamics of personal relationships trump the professional ones As an example one interviewee shared

The startup

d FINDINGSldquoStartup teams are usually three buddies from the same field Usually they donrsquot involve people from other disciplines such as businessrdquo - Claudio Pinto Fairplay Labs

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52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

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55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

StArtu

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 27: Costa Rica Startup Ecosystem Mapping 2016

52 53

on the teamrsquos capabilities and the startuprsquos stage of development some programs might be too basic While some focus more on networking and mentoring others favor structured training Finally some organizations focus more on the entrepreneur while others focus on the project itself The startup and its team should indeed take advantage of available support programs but only after having thoroughly researched which best fits its stage and conditions The present research and mapping effort is precisely to identify the value that each organization can bring and to whom so that available resources can best be utilized

Finally with respect to social ventures which seem to be a growing interest among local entrepreneurs the quest to find a business model is even more dire Since in most cases the founder is motivated by social or environmental impact it is more common for them to overlook the fact that the initiative needs a profitable business model if it hopes to produce the intended impact With little clarity of the fundamental differences between a nonprofit organization and a social enterprise many young entrepreneurs focus entirely on the social benefit without understanding howmdashor even ifmdashthe market will eventually pay for the proposed products or services

THE NEED FOR SPEED ORGANIC GROWTH IS NOT FOR EVERYONE

bull The constraints to rapid growthbull The foreign threatbull Fast is the new bigbull If yoursquore not growing yoursquore dyingbull Holding on too long

Many conditions affect a startuprsquos capacity to grow rapidly whether or not the founder is working on it full time whether he or she is working solo or has been joined by a team

whether it has sufficient funding to market and sell its product (or if it has to rely on free mouth-to-mouth publicity) etc While therersquos nothing inherently wrong with organic growth it has important implications that could make it unsuitable for certain companies or industries

One founder of a local software company expressed concerns about not being able to grow fast enough to meet investorsrsquo expectations Though a good relationship with these angel investors had bought patience and time the urgency was present Adding to the pressure a couple of weeks later the entrepreneur heard about the plans of an Indian company that provided very similar solutions to tackle the Latin American market The local software company had thus far been the only player in Costa Rica and one of the best in Latin America but the founder now feared that a well-funded competitor with aggressive expansion plans could remove its edge

The need to grow fast in the above example was triggered by the investorrsquos expectations but especially by threats of well-funded foreign competitors inserting themselves into local markets which is not an uncommon scenario in industries such as software ldquoFast is the new bigrdquomdashand in industries where technology has leveled the playing field startups must focus on growing as fast as they can if they wish to be successful This speed is often tied to having enough funds to go to market earlier and stronger with the right marketing and a large enough sale force This in turn requires investment which as discussed in On sharing risk and equityhellip is something local entrepreneurs are less than thrilled about

Organic growth might also be detrimental in cases where the entrepreneur has put forth a great quantity of the most valuable resource of all time A common saying in the startup world is that if the company isnrsquot growing itrsquos dyingmdash

One suggested cause for this excess focus on the idea rather than the business model is a lack of business acumen on the part of the entrepreneur Many startups are led by engineers biotech professionals or programmers who have little knowledge of the fundamentals of business This challenge could be offset by bringing the required talent to the team however as discussed in Step one Building the team the criteria for teaming up is usually familiarity and personal relationships rather than covering the skills that the startup needs

As reported by the entrepreneurs and incubator directors interviewed it seems that while young entrepreneurs can readily identify the need for a tech person a lawyer an administrative assistant or an investor they seldom identify the need for a business developer marketing and communication professional or finance person From dozens of conversations with aspiring entrepreneurs it seems the implicit assumption is that a great product is enoughmdashthat everyone will simply recognize how good it is and buy it However experience has taught the not-so-young entrepreneurs that this is rarely the case

The challenge lies in the fact that if the founder doesnrsquot see the need for these areas of expertise he wonrsquot seek out partners in these areasmdashor

will deprioritize hiring staff to fulfill them This was the case in many of the examples we were provided with It was often not until after some time (years in many cases) of being unable to gain traction and sell fast enough that founders realized that their slow growth was due to the low professionalization of functions such as sales marketing and finance

As many things in life with experience these oversights are less common For the entrepreneurs in their 30rsquos this seemed to be a resolved challenge since the majority of the cases reported were either knowledgeable in business or had leveraged their industry contacts and personal networks to fill the gaps

An alternative option to having the business acumen within your team is to seek the support of early stage programs or incubators The structured approach to starting a business the existence of previous experiences and similar cases and the mentorship opportunities provided are without a doubt a great way to test early on with business model possibilities This could help the team ask the right questions test their assumptions more efficiently and receive sound advice for avoiding common mistakes

When seeking the right business support however one size does not fit all Depending

ldquoWhen starting a company entrepreneurs should think not only about the technical knowledge they need but also about the business expertise required so that it becomes a viable business and not merely a hobby Sometimes 3 buddies from college get together and start a company without knowing anything about business and that costs them time and energyrdquo - Gustavo Madrigal Morpho Animation Studio

StArtu

pS

55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

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54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

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58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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DIN

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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DIN

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 28: Costa Rica Startup Ecosystem Mapping 2016

55

and the worst place to be is barely getting by There is a highly emotional component to starting (and feeling responsible for) a company and its staff (see The emotional price of becoming an entrepreneur) and this makes many entrepreneurs hold on longer than they should This situation ends up wearing down the founder and the team while incentives to keep going become scarcer In projects with extremely slow growth co-founders often split up or key team members leave in pursuit of more profitable or exciting opportunities Growth therefore it is not just an externally triggered necessity itrsquos an internal imperative

Because itrsquos hard to determine how fast is fast enough some entrepreneurs issue the warning of not mistaking persistence for holding on because of an unrealistic assessment of the startuprsquos prospects When the reason for the slow growth is something the entrepreneur can control such as a lack of openness to external investing an unwillingness to bring in more talent or simply not putting in the hours required as one mentor told us itrsquos time to make decisions and take action However in the cases where a committed team with sufficient funding has a product that the market simply doesnrsquot seem to want after several iterations itrsquos time to make a drastic change or walk away

EARLY STAGE FUNDING SURVIVING THE VALLEY OF DEATH

bull Local limits of friendly sourcesbull The dangers of running out of gasbull The product before the market

Most local entrepreneurs will tell you that the hardest part is finding seed money Currently only offered by a few incubators in amounts as small as $3000 or through the now suspended Capital Semilla program entrepreneurs find it very difficult to fund the first steps of their startups A company in its early stages when

the market need is being validated prototypes made and the business model tested requires fundingmdashregardless of how much

In experiences reported from more mature ecosystems this money usually comes from either the entrepreneurrsquos savings or friends and family In Costa Rica however friends and family has yet to become a widespread source (see Friends and family as viable source ) and not all founders especially young ones have saved enough to finance this stage With no help from friends and family little or no savings and scarce alternative sources of seed capital testing out an idea can be a significant challenge

The ldquovalley of deathrdquo as defined by one local program director is the phase that comes after the entrepreneur has decided to launch but before the startup can depend on sales for its subsistence At this early stage entrepreneurs are usually no longer on the fence theyrsquove either quit their day job or are in some way primarily working with the startup The young company may be run by a couple of co-founders who may have even hired a freelancer to help with a key activity They have an idea that appears to have great potential and may or may not have a prototype but havenrsquot yet tested it out with customers so arenrsquot sure if the business model will hold If the co-founders are young they get by without paying themselves If theyrsquore a little older they burn up their savings This lack of capital means that the co-founders must wear all the hatsmdashthey sell market produce and take care of financesmdashwhich makes progress slow At this point theyrsquore too dependent on finding customers fast but since the product is not yet ready for the market they have to make large concessions and canrsquot expect to earn much money from the first brave customers willing to try their product This poses the challenge of finding customers who are willing to pay for an essentially unfinished product just so that the company can keep the lights on If they

ldquoTherersquos a common desire to bootstrap and grow slowly rather than give

up equity and grow faster In some industries you canrsquot grow organically

because competition abroad is well fundedrdquo

- David Payne Mentor and Investor

StArtu

pS

54

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 29: Costa Rica Startup Ecosystem Mapping 2016

56 57

ecosystems the lack of planning seems to be a weak point of local startups It was reported that some projects while they offer a promising technology lack the global vision of who the competitors outside of Costa Rica are how to make the transition from the local to foreign markets and what is needed to reach this scale Without these factors included in your plan the chances of making it beyond national borders are significantly lower

Postponing this planning to a later stage results in trouble for startups as they may find out too late that they are ill prepared to compete globally Worse yet they could learn that the industry is already dominated by large entrenched players leaving the limited growth prospects for the local market This is particularly important when dealing with investors whose exit strategy is usually tied to being able to grow beyond Costa Rica To some investors if a local startup cannot show how its model can work outside the local market then its attractiveness as an investment opportunity is reduced considerably

This ldquothinking smallrdquo handicap can mean the difference between obtaining the funding to grow fast and scale up or remain a local company with slow organic growth The latter is far from the success story the community is waiting for

Thinking global however might be easier said than done While it is common to hear companies and experts talk about ldquothe regionrdquo referring to all Central American countries as their aggregate target market of 42 million people the reality is that cultural and regulatory differences make it challenging for startups to cross borders Take the example of Enertiva a five years-old solar energy solutions company in the process of expanding beyond Costa Rica According to its CEO though we tend to think therersquos considerable cultural proximity throughout Central America experience has shown that the way business is conducted related regulations and what the market is willing to pay for often differs significantly from country to countrymdashso significantly in fact that a local partner is often needed to help with adaptation This means that the process of expanding from a small market like Costa Rica to other small markets in the region could be more challenging than expanding for example from one US state to another Funding is undoubtedly the

canrsquot find another source of funding they might over-stretch themselves and force the startup to produce something it canrsquot yet produce Without an infusion of capital the company will be unlikely to generate enough sales or customers to prove that the model works If it does the team has reached the other side which is an entirely much safer place

If a startup like the one described above can prove that it has customers a working scalable model and some decent sales then capital isnrsquot particularly challenging to secure Accelerators and skeptical angel investors will likely find it more appealing because at this stage it is less risky

What can make a startup get stuck in ldquothe valley of deathrdquo however isnrsquot just a lack of seed funding but the inability to identify a suitable business model Some ideas sound greatmdashuntil someone has to pay for the product Incubators and early stage programs reported that many local entrepreneurs convinced of the viability of their idea neglect or postpone the identification of an appropriate business model and instead focus on building the product finishing the app programing the platform etc (see The quest for a business model) As a result they waste considerable amounts of time and resources which are typically in short supply Only when they begin to offer up the finished product

to potential customers do they realize it has some fundamental flaw or was based on false assumptions

THINKING LOCAL POSTPONING GLOBAL

bull Failure to build in scalabilitybull The thinking small handicapbull The unexpected difficulties of expanding to ldquothe regionrdquo

A widely held belief among members of the local community is that Costa Rica is the perfect laboratory for startups Reasons that explain this view include the marketrsquos small-scale high technology adoption and its highly qualified technical talent The rationale is that these conditions provide a good testing ground for the business model so that it can later be scaled up to other more attractive neighboring markets

The missing part of the equation however is this second step of scaling up The most commonly heard pitches during competitions and programs are along the lines of ldquowersquoll start in Costa Rica and later expand throughout Latin Americardquo The plan however doesnrsquot always reflect how this will be accomplished According to mentors and investors particularly those coming from other startup

ldquoMany entrepreneurs havenrsquot given thought to what their market is and who their competitors are They get lost in the fact that they will start here and donrsquot see beyond that They seem to defer the issue of how they will scale - David Payne Mentor and Investor

ldquoThe culture of every country is very different

and connections are vital On top of that you have to

account for differences in how certain industries are regulated in each country Finally youmdashcoming from

abroadmdashdonrsquot have much credibility and in some

instances might be taken advantage ofrdquo

- Alejandro Brenes Enertiva

ldquoMany startups simply run out of gas It doesnrsquot matter how good they are theyrsquore at risk of running out of cash and having to shut downrdquo - Eric de la Goublaye deLaGuayaba

StArtu

pS

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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DIN

G

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

FuN

DIN

G

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

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66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 30: Costa Rica Startup Ecosystem Mapping 2016

58 59

7 Angel investments Although the perception is that there are very few angel investors some of the entrepreneurs interviewed did report having secured their first round of capital from unrelated private individuals 8 Investment clubs A group of private investors gathered around an accelerator that supports startups in order to ready them for an investment round Local examples include Carao Ventures 9 Foreign accelerators and government funds Local entrepreneurs have accessed government sponsored programs such as Startup Chile and US-based accelerators like 500 Startups or Dreamit Ventures

THE GAP SEED OR EARLY STAGE FUNDING

bull The alternatives of early stage fundingbull The push incubators or accelerators can givebull Crowdfundingbull Early stage fund as an alternative

Explained from the startup perspective in the section Early stage fundinghellip the early stage is when investment capital is scarcest At a stage when the startup does not yet have a proven business model nor perhaps a prototype the investment risk is huge This is why ldquofriendly sourcesrdquo such as onersquos

own cash family funding or government grants are most commonly used by local entrepreneurs who are just getting started

However because of a scarce savings (see Lack of saving and investment culture) culture only one entrepreneur interviewed was actually able to use personal savings as a primary source of funding The second possibilitymdashfriends and familymdashis not a common alternative for the average local entrepreneur as not all families have enough disposable income and there is not much investment culture (see Friends and family as viable source) Thus many entrepreneurs see government grants and as the most viable source of funding and it is widely believed that if done properly seed investments from public funds could boost entrepreneurship in Costa Rica (see Government money)

Beyond the three sources described an alternative that attracts many entrepreneurs is entry into contests that offer the promise of seed money (see Startup Competitionshellip) Experiences reported by the entrepreneurs interviewed suggest that these processes can be very time consuming and distracting Most local versions do not offer cash prizes and the international versions that do involve many elimination stages before reaching the final round There are also other detractors of the practice of using competitions as source

Funding is undoubtedly the topic that draws the most attention among entrepreneurs and the general perception is that it is hard to come by In this chapter we will examine the state of funding in the startup ecosystem its main sources the conditions and difficulties tied to accessing them and what has worked for some local entrepreneurs

THE AVAILABLE SOURCES OF FUNDING

The most common sources that local entrepreneurs can rely on to fund their startups as reported by our interviewees are listed below Each source is explained in greater detail in the following subsections and specific information on each organization can be found at our Mapping of the Ecosystem at wwwemprendimientocr

1 Savings and personal credit Entrepreneurs usually start with their own personal savings or personal credit2 Friends and family Relatives or others

who trust the entrepreneur and are willing to invest based on the relationship rather than the project itself 3 Government grants Non-reimbursable funds provided by different government agencies or programs to promote entrepreneurship and support small companies The Capital Semilla program was the main example provided in this category but it was halted in 2014 after just two editions and was still under evaluation as of December 2015 Other non-reimbursable funds include MICITTrsquos Propyme and PINN4 Awards from competitions While very few local competitions offer cash prizes international versions often do 5 Flexible credit from banks Available under the Sistema de Banca para Desarrollo (SBD) this type of funding provides loans for entrepreneurs who cannot provide collateral 6 Incubator seed funds Some incubators provide startups that have passed their first stages with seed capital though it is usually no more than $3000

Funding

e FINDINGS

ldquoRight now there is a funding gap in the ecosystem There should be some sort of investment vehicle that can help entrepreneurs move beyond their first stagesrdquo- Carlos Mora de la Orden Capitalescom

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60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 31: Costa Rica Startup Ecosystem Mapping 2016

60 61

for funding With limited time and evaluation criteria many criticize that it is eloquence and presentation skills that wins prizesmdashnot solid businesses

Incubators such as Auge offer seed money in amounts less than $3000 which may help someone get started but is likely not enough for the entire ramp up Although not monetary in nature joining an incubator also provides the benefit of not having to pay for office space which at least temporarily helps unburden the young companyrsquos cost structure Accelerators such as Carao Ventures provide accepted startups with pre-seed or seed capital in amounts of roughly $25000 usually through convertible preferred stock

Crowdfunding though widely available was not mentioned during the interviews Through websites such as Indigogo and Kickstarter thousands of startups create campaigns that allow them to raise funds to build prototypes or sell their products before making them funding production and taking inventory risks out of the equation Despite its attractiveness this source of funding has only been used locally for cultural projects such as independent movies but no interviewee mentioned knowledge of a startup having been financed in this manner

Finally the last source of seed or early stage funding our interviewees reported was private investment However because of the inherent risk associated with this phase in which the startup does not yet have a proven business model very few local

investors dare to venture For those that do unmet expectations regarding the valuation of the company and the equity stake for the seed investment end up hampering the opportunity (see Scattered angels)

Given the dire landscape of early stage funding some argue there is an unserved need that could be met by a seed stage investment fund either public or private Although there have been unsuccessful initiatives to create one the only publicly advertised fund our research located is InvertUP which is linked to the incubator Parquetec and Grupo Nacioacuten

FRIENDS AND FAMILY AS VIABLE SOURCE (depending on the faMily)

bull No business all trustbull The paradox of the family funded startupbull The emotional component of letting the family down

Capital from close relationships such as friends and family is usually simpler to obtain because it is based on trust Parents extended family members or close friends often invest more on the basis of trust in the entrepreneur than the solidity of the idea or business model This is especially useful during the first stages when the fate of the company is unclear and it is therefore difficult to enter into discussions regarding value potential growth etc

However interviewees also pointed out that not all individuals have disposable

income in the amounts required to provide at least six months of runway (typically $10000-$30000 though varies significantly depending on the startuprsquos cost structure) While others argue that there are clearly individuals whose income would allow them to handle these amounts it is culturally uncommon for people to invest (see Lack of saving and investment culture)

Despite the commonly held perception that family is not a frequent source of funding among the general population a surprising proportion of the entrepreneurs interviewed had launched their startups thanks to cash infusions from close relatives If it is so uncommon why have a large number of the ecosystemsrsquo standing startups been family funded This apparent contradiction may indicate that family and friends though not a common source of funding when available

makes a huge difference in the startuprsquos prospects In an environment where seed stage funding is limited a familyrsquos ability and willingness to provide financial support could be the variable that makes or breaks the launch of a company

Receiving money from family and friends however comes with its own set of difficulties Because the concept of investing especially in startups is not widespread many donrsquot fully realize the high level of risk involved and can be extremely disappointed if the company fails Failing is one thingmdashbut failing family carries a strong emotional component

ldquoFriends and Family is a possible source of funding but culturally entrepreneurs tend to avoid this path because they are

afraid of letting their love ones downrdquo

- Juan Carlos Martiacute CIE TEC

ldquoIn other cultures that are more familiar with the notion of investing itrsquos not crazy for Peter the dentist to bet $20000 on his friendrsquos idea In Costa Rica even though there are many Peters risking that amount of money on a startup isnrsquot something most of them would even entertain Theyrsquoll likely keep it in a bank bondrdquo - Local entrepreneur

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GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

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68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

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70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

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72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 32: Costa Rica Startup Ecosystem Mapping 2016

GOVERNMENT MONEY

bull The SME ndash startup mix-up bull The inadequacy of flexible loansbull The story of Capital Semilla

bull MICITTrsquos bets on innovative businessesbull Startup Chile and turning a city into an entrepreneurship hub

Public funds have recently become a popular alternative and most startups that have been in the market for three or four years have at some point received financial assistance from government programs

According to our research one of the challenges of government sponsored funding is that it is geared toward a very broad target audience that includes one-person subsistence businesses small and medium enterprises and innovation-based startupsmdashmost programs being tailored to the first two Trying to address the needs of biotech and software startups with financial instruments designed for small restaurants and retail shops has effectively left high growth companies with intensive capital requirements out of the loop With time some funds have begun to be channeled to programs trying to meet the needs of innovation-based startups but regulation is still struggling to catch up The distinction between traditional small businesses and scalable high growth innovation-based startups is still blurry with respect to government initiatives some of our interviewees indicate

The most visible initiative of the Costa Rican government to support entrepreneurship and small businesses is the Sistema de Banca para el Desarrollo (SBD) With funds from former agricultural trusts (FINADE) 5 of the profits of public banks (FOFIDE) and 17 of private bankrsquos current account deposits (FCD) it aims to provide small businesses with access to capital For the most part the programs under SBD provide flexible loans that require collateral or fiduciary guarantees which could work for traditional business with assets to offer but is highly inadequate for startups for which value is primarily intangible However for cases in which the small business owner or entrepreneur does not have any collateral to offer SBD offers the issuing bank a financial guarantee of up to 75 of the amount the project requires The catch as some entrepreneurs reported is that the process is often lengthy taking months for the loan to be approved

Another SBD program is Capital Semilla a seed stage initiative that while active offered startups up to $120000 in a combination of flexible loans at a roughly 75 annual interest rate a10-year repayment period and a non-refundable portion of up to $20000 Between 2013 and 2014 20 startups received support from the program and of the estimated $24 million available nearly $800000 had been disbursed by mid-2015 The same year the program entered a revision period and was halted and as of February 2016 its future is uncertain

ldquoThere are people in the ecosystem of the opinion that seed capital from the government doesnrsquot do any good that is a waste of funds But in many cases this isnrsquot so I personally know a couple of startups that had they received this seed funding would be in a completely different place in their development Provided the entrepreneur is ready he or she can really take advantage of seed capitalrdquo - Carlos Mora de la Orden Capitalescom

Critics argue that while well intentioned the program lacks clarity on what constitutes success for the supported startups and how to measure it Although all participants in the call for bids had to undergo a vetting process from authorized incubators it was unclear how progress would be assessed once the funds were released Others also point out that ldquofree moneyrdquo from funds not tied to equity or performance can create the wrong incentives for entrepreneurs as some focus more time trying to win competitions than actually

62 63

developing the startup

Other government initiatives include MICITTrsquos Propyme and PINN programs Propyme supports specific projects within startups as well as small and medium businesses with a strong technological component The program offers up to 80 of the projectrsquos requirements as non-refundable funding (for more details see Ecosystem Mapping or visit the programrsquos webpage) PINN or the Innovation and Human Capital for Competitiveness Program is financed by the Inter-American Development Bank (IDB) and provides scholarships to develop human capital in areas related to science and technology as well as non-refundable funds for innovation and technology based startups

When it comes to government-sponsored programs a surprisingly high number of interviewees referred to Startup Chile as an example of the impact governments can have in their startup ecosystems Two of the entrepreneurs interviewed Diego May of Junar and Andrei Fuentes of Parso had actually been participants of the program

Startup Chile a government sponsored program was designed to attract the top Latin American startups turning Santiago into a hub for entrepreneurship Initially the program admitted 20 to 30 entrepreneurs each of whom received up to $40000 in seed investment equity free Since its inception in 2010 the program has had ten calls during which it received 8000 applicants and accepted 1000 entrepreneurs With time the program has evolved and is now divided into three subprograms

1 The ldquoSrdquo Factory A three-month concept stage pre-acceleration program in which entrepreneurs receive $14000 equity-free 2 Seed A six-month acceleration program for startups with functional products and early

validation where entrepreneurs receive $30000 equity-free3 Scale For startups that show traction and incorporate in Chile the follow up fund grants them $860000 equity-free The startups must remain in the Chilean market for at least a year

Interviewees entrepreneurs and incubator directors all pointed to Startup Chile as an example of good practices in government supported programs for several reasons First its equity and debt-free nature makes it extremely attractive for entrepreneurs especially in Latin America where founders are inclined to retain complete ownership of their companies Second and perhaps more importantly Startup Chile welcomes entrepreneurs from other countriesmdashso much so that only 10 of accepted applicants are Chilean Entrepreneurs are not forced to stay in the local market though they are incentivized to do so through the new follow-up program Scale

Although some argue that 90 of Chilean government funds eventually return to the entrepreneurrsquos home country what has been achieved by this strategy is precisely what our small individual markets have trouble producing deal flow According to its website Startup Chile now receives from 200 to 250 startups per year which in the last five years has turned Santiago into one of the strongest startup ecosystems in Latin America The 2015 Compass Global Startup Ecosystem Report mentions Startup Chile as an example of how governments can successfully spark entrepreneurship by focusing on the ecosystem and serving as a financial foundation to incentivize the development of venture capital Finally although fairly new the tiered approach of the program allows a pipeline to be built without risking too much per individual Through the ldquoSrdquo Factory it only takes $14000 to find out whether or not a startup has a future Structuring the program

ldquoIn Chile they had the same challenges we have currently in Costa Rica There was no startup culture there was still much pressure to work for the public sector They put together Startup Chile as a way to foster startup culture by importing entrepreneursrdquo - Diego May Junar

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64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

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DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 33: Costa Rica Startup Ecosystem Mapping 2016

64 65

around startup phases helps control spending while tracking the startuprsquos progress If one doesnrsquot make it as often happens in among startups it can quickly pivot or go home No long incubation periods no overspending

A BANKING SECTOR THAT IS UNABLE TO SERVE STARTUPS

The closest that a local bank product comes to serving the needs of entrepreneurs is through flexible loans provided through the Sistema de Banca para Desarrollo (SBD) (see Government money) These loans are only available to companies that have been in the market for some time (at least a year) and have enough sales to produce income and cash flow statements that look acceptable to banks

For entrepreneurs who are just getting started the only way to access these funding vehicles is by mortgaging their house offering their car as collateral or having someone serve as fiduciary guarantee Because of this most entrepreneurs and mentors believe that it is preferable to explore other sources of funding before considering personally backed loans ldquoStarting a company is stressful enough without having to add the fear of losing your houserdquo said on experienced entrepreneur and mentor

THE ldquoAVERAGErdquo STARTUP AS A PRIVATE INVESTMENT OPPORTUNITY

bull Entrepreneurs of all ages and the chances for successbull The misleading picture of the entrepreneur bull Traditional safer investment opportunitiesbull Private investorrsquos complaints

According to several interviewees the

overall perception of the entrepreneur and a startuprsquos chances of success may play a role in the willingness of new investors to become angels or join seed stage funds or clubs

As explained in section on Ideal stage of life to start a company when faced with the need for seed capital young entrepreneurs with no personal connections are driven to incubators programs and competitions in search of funds This coupled with the proximity of incubators to universities explains why the vast majority of startups that become visible are led by entrepreneurs under 30 misleadingly creating the perception that the average entrepreneur is young inexperienced and with few connections

However according to the Kauffman index of startup activity the age composition of entrepreneurs in the United States is spread evenly across all age brackets (20-34 35-44 45-54 and 55-64) The sample was equally diverse among the entrepreneurs we interviewed Though present older entrepreneurs are simply less visible

It is also argued however that in some industries the chances of a successful startup increase with the founderrsquos age and that entrepreneurs over 40 are twice as likely to launch high-growth startups If older entrepreneurs have a greater chance of success but are not made visible due to their lack of connection with the ecosystem then the publicrsquos image regarding the profile and success rate of the average entrepreneur may not only be inaccurate but could be hurting the chances that new investors will join

Another factor involved in the wiliness of a private investor to look for startups is

ldquoAlthough there are local investors you as a tech startup have to compete with deals far easier to understand for them like buying a property in Guanacaste and selling it for 2Xrdquo - Diego May Junar

ldquoInvestors have other less risky investment opportunities such as real estate readily available Costa Rica is still building malls and residential complexes Local investors are not seeing the industries of the future they are making money in traditional sectors like commerce and real estaterdquo

- Paul Fervoy Miweb

FuN

DIN

G

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 34: Costa Rica Startup Ecosystem Mapping 2016

66 67

ldquoSometimes investors donrsquot understand startups because theyrsquore used to traditional businesses The way you value the company and how you measure progress are completely different This generates mutual disenchantmentrdquo - Andrei Fuentes Parso

the availability of other apparently safer opportunities Interviewees reported that in the local market there are still many other investment alternatives in traditional sectors such as real estate and commercial development that carry levels of risk and return that local investors are much more comfortable with If the supply of investment opportunities in familiar industries is widely available then the hassle of learning about tech industries understanding other methods of valuation and taking on more risk is simply not worth it to many investors

For those high net worth individuals that seek more passive investment vehicles actively managed funds from the Mercado de Valores de Costa Rica were among the alternatives mentioned while a couple of investors said they keep brokerage accounts in the United States to trade in the stock market

Finally despite these conditions there are individuals in the local ecosystem willing to consider startups as an investment opportunity Investors more familiar with venture capital will look at several aspects of startups when assessing risk criteria for which few local startups might be prepared Among the most commonly mentioned red flags was a startup led by a solo entrepreneur or a group co-founders that donrsquot cover the basics Another shortcoming was the strong focus of many startups on the product with little regard to the business model and scalability potential A low degree of planning especially financially was the third most common reason expressed for not having invested in an opportunity

SCATTERED ANGELS

Three conditions that make angel investors scarce Verticality of relationships Individual sharks Money trumps everything The matching problem

In general the interviewees agreed that angel investment in Costa Rica is still in its very early stages There are of course many high net worth individuals who are capable of becoming angel investors and many of these are interested in startups but several conditions prevent them from actually moving forward Becoming an angel investor requires three things that not all interested investors have startup knowledge willingness to get involved and an extremely high tolerance for risk

In Costa Rica as in most of Latin America the vast majority of wealthy individuals come from decades-old family businesses in traditional industries Though they have high business acumen are incredibly well connected and have plenty of cash to spare these individuals typically have no startup experience Many are part of the second generation of businesses created by their parents so their mission has so far been to expand or professionalize existing businesses not build new ones The industries theyrsquore most familiar with are typically slow to change asset intensive and have consolidated players and high entry barriers Startups on the other hand are knowledge based technology enabled fast changing and can do in five years what older business did in 40 The lack of experience isnrsquot necessarily a deal breaker but this knowledge gap makes investing in startups a task that requires some homework on the part of the investormdashwhich not all investors are willing to do

The value that angel investors bring to a startup isnrsquot just funding but mentorship and connectionsmdashand this requires time Local investors accustomed to more traditional and passive vehicles of investing donrsquot always see the need to get more closely involved with the business Or course if the investor isnrsquot familiar with the type of business or the industry then the relationship defaults to the financial transaction leaving the investor in the dark regarding the startuprsquos progress This as reported by one entrepreneur can raise some problems in the future particularly if things donrsquot go as planned

FuN

DIN

G

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 35: Costa Rica Startup Ecosystem Mapping 2016

68 69

Startups are the fuel that moves the ecosystem When there are too few or when they are too scattered or disconnected other actors donrsquot fulfill their roles in the community For example service providers donrsquot pay attention or adapt their offerings events and competitions get the same repeat participants and incubators may have to lower the bar to fill available slots in their programs This in turn hurts the quality of the projects that are later presented to accelerators or funders The lack of critical massmdashthe tipping point that energizes the ecosystemmdashis a topic that has become an important aspect of the discussion

For investors this has two implications

1 Finding good projects is somewhat harder because there are few to choose from 2 These few are often spread out over various industries

With respect to the first point the catch in the saying that out of every ten startups an investor backs six will lose money three will more or less break even and one will make enough to make up for the losses is that ten investments are required for the average to work What happens if you only invest in twomdashnot out of choice but because there are no other options How do these statistics work under that scenario You canrsquot have 10 of two startups be successful The possibility of being the one holding two out of the six money losers makes many local investors very nervous and conservative in their decisions

For the second the fact that few startups are spread across many industries may not be an issue for an incubator or an accelerator nor for any of the members of the resource base catering to startups It is

however problematic to an investor whose understanding of the opportunityrsquos potential is highly dependent on industry knowledge of markets competitors and value drivers In more mature ecosystems a higher volume of startups means that an investor can afford to focus solely in the healthcare industry because thatrsquos his or her area of expertise In Costa Rica however there might be no more than two or three startups in one area

INVESTMENT CLUBS AND ACCELERATION

Connector role Connections abroad

Access to individual investors isnrsquot as easy as walking to the nearby Starbucks and striking up a conversation As seen in the section on The ldquowhordquo before the ldquowhatrdquo the entrepreneurrsquos personal contacts are sometimes the only way to connect with an investor In a society with high power distance family ties and personal friendships are the elevators

While the lack of startup knowledge and willingness to get involved are significant reasons why there are few angels in the local ecosystem perhaps the most important one has to do with risk tolerance Interviewees who had experience in more mature ecosystems pointed out a remarkable difference between investors they knew abroad and those they knew locally the willingness to simply give it a shot with little assurance of the outcome Itrsquos not that foreign investors are reckless but perhaps theyrsquove repeatedly seen it work and are more inclined to take the bet Local investors are much less loose when assessing risk and will either not get in at all or demand huge chunks of equity to compensate for the uncertainty

Beyond the circumstances that make angels scarce there are also cultural factors that make the investor-entrepreneur relationship challenging In Costa Rica as in the rest of Latin America wealth usually comes from families This ties money to social distinction and in turn to power This has created more vertical societies than in other parts of the world which inevitably affects how people negotiate While this is changing with time as new generations take over family businesses some of the entrepreneurs interviewed feel that many investors assume that having money gives them the upper hand This verticality does not fare well

with entrepreneurs particularly younger generations that are less willing to concede to the pecking order

This verticality and the insistence of old school investors to play the power card not only alienates entrepreneurs but hampers the investorsrsquo ability to learn about startups This creates a breed of overly aggressive investors which many entrepreneurs reported having come across These ldquosharksrdquo usually show up at the table with a money-trumps-all mentality valuing the startups based on the cash infusions they provide or over estimating the worth of their connections In one case an entrepreneur seeking a $50000 investment was asked how much he was personally going to invest When he said $20000 the investor replied ldquoOk so that means Irsquoll be keeping about 70 of the companyrdquoThese types of interactions not only prevent deals from happening but create a gap between investors and entrepreneurs making the latter distrust private investors as a source of funding

THE CRITICAL MASS PROBLEM AND ITS IMPLICATION FOR INVESTORS

bull The hit rate of venture capitalbull Inch-deep in many industries

ldquoIn Silicon Valley the one in charge is usually the entrepreneur in Latin America the one with the money is the one who tries to call the shotsrdquo - Diego May Junar

ldquoThere are investors in the local ecosystem but I wouldnrsquot say they are angels I donrsquot see many of them willing to get involved with startups - Juan Carlos Martiacute CIE TEC

ldquoIn Costa Rica we donrsquot have angel investors that can write a $100000 check and not worry about what happens Here investors need it to workrdquo - Paul Fervoy Miweb

ldquoSince there are so few startups you have to look at very different projects and industries You canrsquot specialize in one area You have to go in inch deep in many areas which is a challengerdquo - David Payne Mentor and Investor

FuN

DIN

G

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 36: Costa Rica Startup Ecosystem Mapping 2016

70 71

This is the context in which investment clubs or accelerators such as Carao Ventures have helped bridge the gap As discussed in previous sections many entrepreneurs are still learning how to build their business models professionalize management and understand what investors are looking for By the same token many investors are still learning about the differences between the traditional businesses they have always run and innovation-based startups particularly with respect to their valuation practices and return potential This mismatch of knowledge and expectations makes it difficult for both parts to find common ground The connector role that investment clubs and accelerators fulfill is to educate both sides and help match expectations so that a deal is reached

Through rigorous admission processes structured guidance and personal mentoring accelerators get the startups ready for investment rounds among their network of investors The entrepreneurs get the kind of hands-on support they urgently need The investors who trust the accelerator managerrsquos judgment and credentials feel more at ease with making the investment than if they had met the entrepreneur at a coffee shop In a business culture that is based on relationships this is trust by proxy Accelerators have also played a role in having entrepreneurs connect with other ecosystems particularly in the United States as is the case of Slidebeanrsquos participation in 500 Startups

NEW GENERATIONS OF FAMILY BUSINESSES MAY CREATE AN ALTERNATIVE

bull Erasing the generational gapbull The spin-off preference

The generational gap that some of the entrepreneurs and investors identified as an obstacle in finding common ground could diminish if not disappear as new generations of family businesses start to become more involved in decision making While this doesnrsquot resolve the fact that part of the mismatch is produced by investors not being entrepreneurs themselves decision makers within the same

generation of entrepreneurs certainly helps bring them closer together

Some family businesses have begun to take steps in this direction though they arenrsquot yet openly sourcing projects from external entrepreneurs Instead they are working with people within their personal network to develop possible spin-offs of their existing businesses Although one interviewee from a family-run company clarified that they donrsquot entirely rule out the possibility of investing in external projects they must clearly fit with the portfolio of family businesses for them to be interested

As these younger generations become interested in developing entrepreneurial capabilities within family businesses or start backing new ventures a new bridge could be built between local investors and entrepreneurs

ldquo I would say that the majority of Business economic groups and venture capitalists in our countries will prefer to invest in startups or ideas within their own circles of trust Hardly an entrepreneur with an idea in those countries will pass the door of the office if the investor doesnrsquot know himrdquo

Marcelo Lebendiker

FuN

DIN

G

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 37: Costa Rica Startup Ecosystem Mapping 2016

72 73

Conclusions and the path ahead

This section attempts to summarize the main conclusions derived from the study with the particular aim of offering a perspective on what can be done to strengthen the startup ecosystem

A SYSTEMIC ISSUE

bull Itrsquos all about network densitybull An example of interdependencebull Focusing on the big picture

After long conversations with members of the startup community it was clear that though there is great value in individual initiatives a great untapped potential lies in the articulation of those efforts Network densitymdashor the amount of connections that exist among entrepreneurs mentors incubators investors events and all other actorsmdashis what can propel the Costa Rican ecosystem to the next stage

Of course this is not a challenge that

any single actor can address alone From the moment the issue is framed from the ecosystem perspective the connections and interactions between them take center stage in the discussion The task at hand is systemic what each actor does will create ripples (positive and negative) across all other actors that are connected to them intentionally or not

Letrsquos illustrate this with a scenario If events are not generating enough interest among newcomers early stage programs and incubators will have a hard time filling their spots and will be forced to lower the bar If incubators donrsquot get good projects or donrsquot do a good job quickly validating entrepreneursrsquo ideas they will waste valuable resources (the most important being time) wonrsquot produce viable startups for incubators to pick up and will put their sustainability at stake If this happens the few investors interested in startups will find there is not enough deal flow to work with and will

return to safer more familiar investment vehicles If these investors donrsquot actively participate in the ecosystem Costa Rica will perpetually depend on government grants to incentivize startups which could move to the swings of political circumstances In parallel if not enough coworking spaces can develop and identify viable business models to serve the community spaces to meet and connect will diminish making startup teams weaker and solely based on ties of friendship

If one moves they all do if one fails the entire ecosystem suffers Although the effects might not be immediatemdashleading us to believe we can survive as islandsmdashsooner or later isolation takes its toll Conceiving this challenge as a collective rather than an individual one can help us rethink our survival and growth strategies Instead of looking at the part we could focus on the whole Many initiatives would cease to be repeated efforts new linkages between different stakeholders would emerge and relations between the common stakeholders would lean towards cooperation rather than competition In a nascent ecosystem no single actor can claim independence or think they can impact startups on their own Failing to think about what precedes them or what comes after their role in the ecosystem will only leave entrepreneurs stranded

CULTURE UNDERLIES EVERYTHING BUT CULTURE IS BUILT FROM PERSONAL CHOICES

bull The very personal decision of trusting bull Pay it forwardbull Collaboration 1+ 1 = 3

As we have seen cultural elements underlie many of the decisions we make and how we relate to others within the startup community Trust is the

fundamental basis of relationships and while some that affirm that mistrust is merely a reaction to previous experiences the truth is that it can also be a deposit towards future ones

Having identified trust as a vital component in our ability to collaborate build startups create organizations and strengthen the community we should pay closer attention to how we can foster it After all trusting others and being trustworthy is a very personal matter Social capitalmdashwhat communities cities or countries build up when individuals trust one another enough to come together and collaboratemdashmight be our most valuable currency when trying to develop our startup ecosystem

Another significant cultural determinant of the strength of our ecosystem is the degree to which we help one another Dubbed ldquothe pay it forward culturerdquo it has been identified as the intangible ingredient of successful ecosystems around the world including Silicon Valley Active mentorship and knowledge sharing or simply showing interest in seeing others succeed are all forms in which the pay it forward culture can manifest This too is an individual decision that if done consistently can spread among all members of the community There are currently many entrepreneurs who regularly volunteer as mentors However we have still a long way to go

The capacity of organizations to collaborate stems directly from the capacity to collaborate as individuals Trust-based relationships between individuals can bring organizations together and create the connections our ecosystem so desperately requires The decision to think in terms of ldquowerdquo instead of ldquoIrdquo is also a personal decision that when considered at an individual level might seem irrelevant but in the aggregate of the startup community has more tangible effects Individualism

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 38: Costa Rica Startup Ecosystem Mapping 2016

74 75

and collectivism are tendencies that are deeply rooted in each nationrsquos culture but again each is comprised of personal choices Yielding to others who might be more suited to a particular challenge joining forces with similar initiatives to maximize impact and focusing less on individual recognition and more on impact are just some of the examples that could create great value in associating with others In this sense the joint work of two entrepreneurs two organizations or two initiatives could be more impactful than the sum of their individual efforts

VISIBILITY AND KNOWLEDGE SHARING WILL SPEED THINGS UP FOR EVERYONE

The role of common spaces Advantages of collective learning The challenge for organizations

The foundation of the startup community is each individual and his or her personal decisions about trusting helping and collaborating with others Beyond that it becomes a task of visibility and the flow of knowledge and experiences Once connections or relationships have been cemented sharing through common spaces can speed up learning for the entire community

While events and coworking spaces are the starting point online platforms could also constitute meeting points for entrepreneurs investors and mentors The focus of this exchange is to learn through the experiences of others and give back in the same manner This will not only help individuals in ecosystem to overcome challenges through best practices from more experienced actors but will strengthen the bonds between them Reciprocity is embedded in human nature and giving first is the best way to elicit it

At an individual level there are indeed

entrepreneurs in our startup ecosystem who are committed to helping others and sharing experiences but there are also many others who work in in complete disconnection from the community Entrepreneurs play a pivotal role in the ecosystem development as they are in some sense pioneers learning how to solve local challenges for the first time These lessons will be invaluable to those following their footstepsmdashas long as they are shared Obviously the motivation canrsquot be personal gain If it is to foster trust and collaboration it must start with a genuine interest to help others

With respect to organizations the challenge of betting on visibility and knowledge sharing may be larger as they must overcome not only our cultural tendency to downplay mistakes and save face but also the scarcity of resources Again how the situation is framed could make or break a partnership individualistic thinking views resources as something to be competed for while collective framing allows unsuspected opportunities to arise from synergies The third challenge for this type of actor is organizational in nature being able to make their respective teams work across various agendas and philosophies Despite these challenges we feel that what is at stake is well worth the effort boosting the development of the ecosystem through relationship building and collective learning

ENTREPRENEURS MUST LEAD THE WAY

bull Leaders and feeders of the ecosystembull Mentorship as the cornerstone of the communitybull A long-term commitment from entrepreneurs

Once we understand the nature of the relationship between a certain culture

and the actors of its startup ecosystem the next step is to contemplate the role each actor of the ecosystem is meant to play While incubators universities government resource firms and events are all extremely important actors in the ecosystem it is entrepreneurs who should be leading the community overall

Organizations and universities have their own primary agendas most government roles change hands every four years and resource firms are businesses that seek a profitmdashbut entrepreneurs and their respective startups are the drivers of it all It is only when enough startups develop and entrepreneurs get involved in the community that all other actors become truly relevant impactful and sustainable Programs and incubators may guide aspiring entrepreneurs in developing business models and creating prototypes but it is through the mentormentee relationship that young founders find inspiration validation and the will to continue despite all hardships In this sense this relationship could very well be the cornerstone of the entire community Though it might be easier for the entrepreneur to just focus on their business without worrying about whatrsquos happening around them the truth is that no other actor is better suited to take on a leadership role

Entrepreneurs are at the center of the ecosystem and paradoxically it has been the support organizations that have been at the front of the discussion The experience so far has been that whenever government wants to understand how to better address the needs of the startup community it calls upon directors of incubators programs accelerators and organizations but oddly not a single entrepreneur Though fragmented representation of the startup community is being taken over by organizations while its more important constituency is sitting in the passenger seat

The opportunity to lead the community however also gives entrepreneurs a significant responsibility Fulfilling their role in the development of the ecosystem implies a long-term commitment that should be independent from the outcome of their ventures It is this sustained commitment that allows the relationship to continue to create value and networks to keep growing The good news is that just as any other horizontal inclusive network based form of organization roles are not fixed Leadership is constantly renewed as new members join the community

a bet on a bottoM-up approach

bull Resisting the urge to hand down knowledge and micromanagebull Networks instead of hierarchiesbull Open source of best practices

This view of ecosystem development in which organizations constitute themselves as feeders while entrepreneurs become leaders of the community is the very definition of a bottom-up approach By allowing the community to grow organically from the shared knowledge experiences and relationships of entrepreneurs we can avoid the common mistakes made in the past when well-intentioned organizations sought to ldquohand downrdquo knowledge and resources in order to ldquoassistrdquo entrepreneurs

A top-down approach in which experts constitute themselves as gatekeepers only stifles the startup community as it tries to control through hierarchy what naturally works as a network No government incubator or any other expert should attempt to lecture the startup community or ldquoshow them how itrsquos donerdquo qualified as they may be The lessons and ultimately the decisions about how to grow should not come from an organization or government

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 39: Costa Rica Startup Ecosystem Mapping 2016

77

but from the aggregate of entrepreneurs themselves

We must foster the creation and sharing of knowledge from direct experience we need entrepreneurs to own the lessons so they can pass them on The added benefit is that this ldquoopen sourcerdquo approach will allow us to resolve an unspoken but very prevalent issue in our local communitymdashthat of the expert who seeks personal recognition by being ldquorightrdquo and doing things their way

The challenge then is not one of control and regulation but of creating the conditions to empower entrepreneurs to lead the startup community Government policy regulation incubation programs accelerators and events should all be there to support and foster this environment while restraining from the temptation to manage it

a long-terM vision of the ECOSYSTEM THE ORGANIzATIONrsquoS CHALLENGE

Favoring a long term view Thinking ldquoandrdquo instead of ldquoeither orrdquo

Many of the decisions we make as individuals and organizations have to do with the time frame we consider while making them If mainly focused on the short term many of these decisions will lean towards securing our individual wellbeing and immediate gain Particularly when resources are scarce this approach could be justified as ldquosurvivalrdquo If however we consider the long-term view we might be more inclined to take a look at how we depend on others the importance of relationships and the value of collaboration Having this broader view of tomorrow might influence the decisions we make today

Though challenging shaking off the short-term mode can help us think

about how to create shared valuemdashin other words how to think in terms of ldquoandrdquo rather than ldquoeither orrdquo Itrsquos often not our first instinct as we are used to viewing our participation in any system as a ldquozero sum gamerdquo in which in order for me to win someone else must lose In most cases however this is not truemdashif we take the time to consider how to achieve it While there is nothing inherently wrong with competition if our local ecosystem is still developing and resources are scarce our strategy should be how to multiply them not how to divide the little that is available

If our initiatives are seen as part of an ecosystem in which other players influence and are influenced by our choices we have the opportunity to make a contribution that makes more sense to the community as a whole as it builds upon not besides what others are doing This would reduce repeated efforts and would consolidate the yet small startup base rather than divide it among individual initiatives

emsp

Having spoken with and learned from so many different actors in the Costa Rican startup community has been a valuable experience and a great honor The ideas discussed in this report the lessons and best practices expressed and the hypotheses formed regarding how to improve the ecosystem maymdashor may notmdashseem completely new to some members of the community after all this is the result of aggregating the knowledge that through different individuals was already there

For newcomers to the community this effort seeks to provide context and a current status of the dynamics of the ecosystem so that they can find better ways to insert themselves get the support they need and make a contribution For the ldquousual suspectsrdquomdashexperienced members of the communitymdashthis recount attempts to make explicit visible and concrete what we may have known individually but were not openly discussing Thus we hope this mapping becomes the stepping-stone that sparks the needed conversation on how to articulate the ecosystem which was the reason that drove the journey all along

Final Thoughts

76

78

80

82

84

86

88

90

92

94

96

98

100 101

Page 40: Costa Rica Startup Ecosystem Mapping 2016

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