Where Are The Exits?
In recent years—not many, maybe 2—there's been a surge of interest across social media, events, reports, and all the media noise around technology-based entrepreneurship in Colombia. While this isn't entirely new, as programs from Proexport, the Ministry of Communications, and organizations like Endeavor have been supporting entrepreneurs for years, there's a renewed focus on promoting a Silicon Valley-style model.
The Core Problem
In a period of no less than 6-10 years, this Silicon Valley model will not be successful in Colombia.
The reason is simple: Colombia lacks the exit mechanisms that guarantee the existence of entrepreneurship models in the United States.
What Is an Exit Mechanism?
Easy. It's how an investor will recover their investment plus profits at some point, ideally soon, in the short term.
How It Works in the US
The US Model
An angel investor gives you $50,000. They expect you to sell in a Series A round to an investment fund for $1 million, converting their $50,000 into $300,000, ideally within a year.
If the company fails and you never have a product or don't sell the company for $300,000, the investor understands the risk and generally speaking, nothing happens. (To hedge, the investor put $50,000 into four companies, three of which failed and one sold for $300,000. Even losing $150,000 on the three failed companies, they recovered 100% of their investment and made an additional $100,000.)
The fund that bought in the A round expects one of two things: either a Series B where they sell their $1 million stake for $50 million, or the company goes public (IPO) on the stock exchange and their $1 million stake becomes worth $300 million.
How It (Doesn't) Work in Colombia
Reality Check #1: No Angel Investors
You create your company and there are no angel investors. Period. If you find an investor for the same $50,000, that's a loan. If your company fails, the investor expects their $50,000 back.
Reality Check #2: No Series A
Okay, let's not be so negative. Let's say your company doesn't fail. What are your alternatives?
Option A: An investment fund for Series A? No, that doesn't exist in Colombia. Investment funds only invest in certain sectors, and software, internet, etc., are not among them. (I've spoken with several funds, so you can trust me on this point.)
Option B: You yourself buy out your investor's share from profits or operations. Essentially, you're paying back the loan, except since they didn't charge interest and theoretically gave them company participation, you're buying back their stake.
The Optimistic Scenario
Let's say you're not so negative and you have a family member or best friend from school who's a partner in an investment fund. You manage to get a Series A and make history. First, congratulations! Second, let's worry about how that fund will recover its investment.
Option A - IPO: Although theoretically possible in Colombia for a couple of years, it's almost impossible in practice due to legal restrictions and protections aimed at preventing investors from going broke. Very, very few companies have managed to go public.
Option B - Buyback: You buy out the investment fund's stake in the company.
The Hope
At this point, let's hope the investment fund does its job and becomes the first to sell a Colombian company to a foreign fund or investor. We've seen this in Brazil and Argentina, but not yet in Colombia.
The Bottom Line
Until conditions exist for clear, fast exit mechanisms with returns for investors, Silicon Valley-style entrepreneurship in Colombia will not take off.
Other Considerations
There are other important considerations about this entrepreneurship model, like focusing on the product/service rather than getting rich overnight, but that's material for another post.
Note: This analysis from 2012 reflects the Colombian startup ecosystem at that time. The landscape has evolved significantly since then, though exit mechanisms remain a critical challenge in many emerging markets.