A week or so ago, I wrote about a post from Fred Wilson, of avc.com, who wrote about the “Darwinian evolution of startup hubs.”  I noted at the time that there were few examples of what Wilson called “foundational” companies in Latin America, but suggested that perhaps such foundational activity was occurring in Brazil.

I was pleased to hear this week from Hugo Stevens, of the Startup Factory.  Hugo shared some of his thoughts on this subject with me, and he kindly agreed to let me publish his remarks here.

Enter Hugo

I read your article on Startup Hubs, which I think it’s an extremely critical issue for developing a sustainable ecosystem (I actually wrote a post along those lines). I pretty much agree with your main points; I would add that we definitely need a Foundational Company (or a few) that helps 1) develop (and spread) the necessary skills for building a large company (which as an ecosystem we still don’t have; we have learned how to try and validate an idea but scaling is a completely different animal) and 2) prove to investors that big companies can come out of ‘air’ (as one of them put it, meaning a company that wasn’t based exclusively on physical assets/real estate/franchises). With these two elements in place, more startups should develop more easily.

In order to achieve this, a foundational company should (in my opinion):

1. target a large economy (I would argue that Mexico is the best place to do this, since it’s the only significantly large economy besides Brazil plus because of language barriers it’d be easier to expand to Latin America)
2. be based locally so local people learn how to scale a company (it’s of no use if someone has a great idea but then moves to Silicon Valley and develops it there – people wouldn’t learn much so it would be hard to replicate)
3. be visible so future founders and investors can use it as a reference (this probably means it needs to be consumer focused or at least target consumers even if businesses pay for it) and
4. have large revenues AND profits (this is the critical point; this is the only measure that will be meanningful to investors in order to invest in other startups). I don’t think the current ecosystems/VCs will support a company’s losses for long even if it’s a great opportunity and an acquihire won’t really provide the returns investors need.

The key implication is that starting lots of small companies that will stay small (in terms of revenues even if they have lots of users), as much as it helps inspire people and attract more potential founders, will not really solve the problems mentioned earlier (develop company-building skills and attract investors). This is of course my personal opinion but it’s based on experiences with founders and investors over the last 3 years, and it’s where we are focusing at Startup Factory.