The Innovation Economy
Why Latin America must make it a priority and learn from the US.
Entrepreneurship plays a crucial role in shaping both a healthy economy and society. By driving innovation, creating jobs, and fostering competition, entrepreneurship unlocks significant value and contributes to economic growth. It empowers individuals to pursue their ideas and solutions, creating a diverse range of products and services that cater to the needs of society.
We may be biased at Nascent given our profession, but we are firm believers that a countries ability to cultivate an environment where entrepreneurship, company creation and innovation are prioritised, can be one of the main drivers of economic prosperity.
The innovation economy posits that knowledge, entrepreneurship, innovation, technology, and collaboration are the key drivers of economic growth.
Lessons from the past 16 years
Gideon Rachman, the Chief Foreign Affairs columnist for the Financial Times, told a cautionary tale in his article in July 2023, where he outlined how far Europe has fallen behind the US since 2008.
“In 2008, the EU and the US economies were roughly the same size.
But since the global financial crisis, their economic fortunes have dramatically diverged. As Jeremy Shapiro and Jana Puglierin of the European Council on Foreign Relations point out: “In 2008 the EU’s economy was somewhat larger than America’s: $16.2tn versus $14.7tn.
By 2022, the US economy had grown to $25tn, whereas the EU and the UK together had only reached $19.8tn. America’s economy is now nearly one-third bigger. It is more than 50 per cent larger than the EU without the UK.”
The United Sates have been laser focussed on private markets innovation over the past 16 years since the Financial Crisis of 2008.
It’s incredible to see the sheer speed at which the US has largely transformed from the Industrial Age economy that it was by and large in 2008 to the top performing Innovation Economy that we see in 2024.
The table below highlights the largest US companies by Market Cap in 2008 compared to 2024.
The table above is interesting for a few keys reasons.
Microsoft was the only software business that made the top 10 in 2008. Every other entry you could classify as a classic industrial age business. By 2024 nearly every business in the top 10 is a digital or software business.
The size of the companies today are an order of magnitude bigger than they were in 2008. 6 out of the 10 today are valued well over a Trillion dollars. Moreover the largest company in 2008, ExxonMobil, wouldn’t even make the top 10 today. In fact Number 10 today, Visa, has a market cap that is $123 Billion more than the largest company in 2008.
Given how small venture is as an industry compared to other asset classes, it is an interesting observation is that the 6 most valuable companies in the US today were initially funded by Venture Capital.
It is important to highlight that the nature of todays digital companies compounding revenues is fundamental as to why they have so vastly out grown their non digital peers in the intervening 16 years.
If we did a similar table of comparison for Europe, my bet would be the top 10 companies would be pretty unchanged over the last 16 years. All this to say, that if Europe had had a similar focus on investing in and enabling its innovation economy, it may not be in the situation that it finds itself today, with low growth and very few if any digital companies that come close to the largest ones in the US.
So how does Latin America learn from this?
Focus on the Regional Hubs
As history has taught us, innovation is typically fostered in densely populated global hubs which develop certain strengths and expertise. New York, London and Hong Kong have long focussed on being hubs for Financial Services. Silicon Valley and Seattle have a tradition of technology and Software Innovation.
In São Paulo and Mexico City, Latin America has two capitals in the top 10 of largest cities globally. This puts the region in a strong position to be able to focus on developing the critical mass of talent, capital and company creation incentives that can drive the growth of the regions Innovation Economy.
From a venture scale perspective, the opportunity in Mexico City and São Paulo is tantalising. You can build a $100m annual revenue business in either of these hubs without needing to expand geographically.
Compare this to Europe where regional businesses need to tie together; London, Paris and Berlin to get to a reasonable scale or take the leap to the United States. No easy task.
Take advantage of its geographic proximity to the United States
As we discussed in our last post, trade is a function of geography and Latin America is geographically blessed by being on the same general longitude as the United States.
The United States have been investing in private companies and enabling Innovation for a longer period than any other part of the world. Venture Capital was born in Silicon Valley in the 1970’s. Still relatively recently. So it is no surprise that the country has thousands of Venture Firms looking for attractive opportunities. It is only in the last five years or so that many of these firms started looking outside of their home country for exciting companies to invest in.
The pandemic was largely responsible for enabling many US investors to start looking abroad remotely for the first time. The amount of venture dollars that flowed from the US to Latin America (as well as Europe, Africa, India and Asia) was incredible. All drawn by the large unaddressed TAMs and limited local competition.
While many of these Firms have retrenched to their home markets during the current bear market, they have now had a taste of the opportunity set south of the border. Many Firms are still actively keeping an eye on dealflow and being opportunistic when the right company comes along.
Over the coming years and decades Latin America should continue to make it as appealing as possible for International funds to invest in the region. Mechanical incentives such as making sure Latam companies have their Holding Company domiciled in Cayman or Delaware goes a long way in getting international firms comfortable with investing in Latam.
Incentivise Entrepreneurship
Latin America has come a long way in making the prospect of working for or starting a company appealing. Working in tech is no longer a second rate option, it is often the preferred option.
There is a lot more regional governments can do to make it an easy option for talented, ambitious people who want to solve a problem they think they can fix.
Tax incentives are a great place to start. In the UK there is the Seed Enterprise Investment Scheme (SEIS). The SEIS scheme allows qualifying investors who are tax resident in the UK to reduce their income tax bill by 50% of the amount they invest in an eligible startup.
As you would imagine this had been hugely beneficial in driving more investment capital towards the earliest stage companies being started in the UK. This capital has been largely deployed by Angel investors who want to support young companies and participate in the upside of successful startups.
R&D tax relief for eligible R&D activities that make an advance in science or technology is another good way to incentive companies to innovate. In the UK there are two different schemes, one for SMEs and one for larger companies. Notably, a company can only apply for these tax reliefs against corporation tax, so they are only relevant for companies (not partnerships or individuals).
Grant funding is another attractive way of incentivising entrepreneurship across Latin America. By providing none dilutive capital to founders, you enable them more time to iterate on their business idea and get themselves investor ready. Local governments and Institutions across the region should act as enablers to innovation and foster company formation as much as possible.
The next 10 years are set to be transformative for Latin America, but its full potential will only be reached if we learn the lessons from other countries and set ourselves up for success as best as possible. Human Innovation will always prevail but there are things we can do to grease the wheels in the meantime.
Until next time.
Saludos,
Archie, Bernardo and Victor
If you are interested in learning more about what we are building at Nascent, we would love to connect!
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