Bogotá is consolidating its position as the startup and tech capital of South America. This article will explore the incentives and policies Colombia has implemented to encourage the growth of startups.
To talk about Bogotá is to talk about Latin America. That is because the most pressing issues that we face are in fact faced by most of the continent’s economies. For instance, we have a population underserved by the banking system; low high-school and college enrolment rates; lagging SME productivity; few entertainment capabilities for the masses; low health coverage as well as poor health services quality, and low e-commerce activity. Amongst many others these are challenges that for the most part describe the region’s economic development stage.
These huge challenges have been addressed somewhat successfully for the last 20 years by local governments. However, the rise of technology has allowed public policy to turn to the private sector, and particularly disruptive startups, for answers. Paradoxically, the region’s most pressing issues are those that currently offer the largest economic opportunity for those willing to take the risk.
Recent analysis by Bogota Tech Advocates (BTA), indicates that venture capital (VC) investors in Latin America are clearly signaling where they think the region is moving towards. Just between January and February 2021, there were more VC deals struck than those closed between June and December 2020. In other words, despite the pandemic and a significant GDP drop, the VC dynamic is gaining pace in 2021. In terms of sectors, since September 2020 the realms of Fintech, Events & Entertainment and Health have received the most resources – close to US $1.2 billion. Robotics has made the list in a stellar manner, receiving a whopping $750 million between January and February 2021. As you can tell, startups in these sectors contribute to solving the regions challenges and investors acknowledge that, in doing so, there is money to be made.
Bogota and Colombia are aware of these trends and have been quick to seize the opportunity.
Just a month ago, Congress introduced the “National Entrepreneurship Law”, a milestone that organizes and sets forth the means by which public policy will foster entrepreneurship and technological adaptation in the years to come. Some of the most relevant aspects of this law are a significant reduction in red tape related to company incorporation and a preference for startups in public-sourcing bids and lower requirements to access credit, amongst many more.
However, even before this law came to being, national government had taken a significant first step by introducing tax incentives to both the startups as well as the investors. On the one hand, if a startup meets certain criteria it becomes exempt from corporate tax for a period of 7 years. This incentive did not come without some discussion as many argued that by definition, startups are not meant to necessarily turn a profit but rather increase their value given their exponential growth. Nevertheless, after consultation with the private sector, the Government considered that 7 years of corporate tax exemption signaled the market in a positive manner, acting as an incentive to create and build a company, regardless of if they turned over a profit in time or not. A more effective tax inventive, in our view, was put forward a few months later in 2020, this time directed at the investor (not the startup) in the form of a tax deduction. Specifically, if an investor chooses to put capital into a defined set of startups (including of course, tech-based companies) he or she is entitled to 165% deduction of the investment made against his or her capital gains tax. This is a clear invitation for investors to consider these high-risk-high-returns companies as part of their portfolios. Seen in perspective, both set of taxes and the newly enacted law put Colombia’s bet on entrepreneurship and technological development at the forefront of the region. Bogota, the capital, is where most of the magic is taking place.
However, one has to acknowledge that these milestones did not emerge out of thin air. Truth be told, Colombia and in particular the city of Bogota, have incubated a thriving ecosystem that for more than 10 years has collectively built a solid support system and serviced many successful startups along the way. Perhaps the most relevant case study is Rappi, the country’s most valued unicorn.
Rappi is a super app providing anything from food delivery to money withdrawal to insurance purchases and has recently filed to become a bank. In under 7 years, it has grown from scratch to a US $3.5 billion company with operations in 9 Latin American countries, including all major economies such as Brazil, Mexico and Argentina. In 2019, Rappi received $1 billion investment from Softbank’s Vision Fund, the Japanese mammoth, in a move that went beyond boosting the company’s position in the market and helped put the region in the global VC radar.
BTA was launched in late 2017 in an effort to bring the global conversation on entrepreneurship tech to the local ecosystem as we are aware of how critical collaboration and keeping a close eye on technological trends has become for an economy to thrive. We will continue to strengthen our ties to the GTA network, and we invite all of those interested in knowing more about Bogota and its expanding startup and tech sectors, to reach out. It goes without saying that we are always up for a good cup of coffee too.
Jeronimo Silva is Co-Founder and Group Lead, Tech Bogotá Advocates