How Uruguay Became a Cluster of ‘High Quality’ Startups, Talent

Paulo Passoni, an investor and former Softbank executive, talks to Bloomberg Línea about how the South American country is attracting the best companies, and the best talent, in Latin America

Paulo Passoni, managing partner do Valor Capital Group
June 23, 2022 | 05:22 PM

Montevideo — Venture capital investor Paulo Passoni, who is now looking to support startups after having been a key player in SoftBank for Latin America, was in Uruguay two weeks ago and says he observed that the Uruguayan technology sphere “is on the move”, and where he talked with entrepreneurs about the local startup cluster, which he said has positioned itself as a “talent pool” and an incubator of new ideas for the region, particularly in infrastructure for fintechs.

In an interview with Bloomberg Línea, the Brazilian investor highlighted the fact that the Uruguayan startup space has been developed both by local entrepreneurs and by the arrival of Argentine entrepreneurs, who in recent years have moved to the other side of the River Plate, such as Marcos Galperin of MercadoLibre, and Martín Migoya and Guibert Englebienne of Globant.

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“You don’t get that kind of quality anywhere else in Latin America. What are the drivers of that cluster forming in Uruguay?” he asks, and points to Argentine former president, and current vice president, Cristina Fernández de Kirchner, with many entrepreneurs in Argentina having become critical of her, and who have looked for greater opportunities, and a more receptive environment, across the river in Uruguay.

“There should be statues of Cristina Fernández de Kirchner in every corner of Uruguay,” Passoni joked, implying that it is her stance that has encouraged the growth of startups in Uruguay, and the flight of talent there.


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Paulo Passoni

Until April, Passoni was until a managing partner at SoftBank’s Latin America fund, and prior to that was at Third Point as director of emerging markets, with a focus on Latin America, but has now decided to pursue his own venture capital investments in the startup market.

Regarding the current situation, as startups in the region have begun to shed staff as part of their belt-tightening measures, Passoni said we are living in a time of “regime change” in which only the “survivors” will be able to get ahead.

“When business leaders run out of cash, they will have to deal with their reality,” he said.


He also anticipated that there will be “surprises” as some companies that have run out of cash will have to be sold, “for next to nothing”, and said he anticipates that growth will not return until 2025.

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The following interview has been edited for length and clarity.

Bloomberg Línea: You recently said you are very optimistic about Uruguayan startups and the startup sphere in the country. Can you talk about the country’s potential?

Paulo Passoni: I think the first point is that when we think about development clusters in any industry, the quality of the people in those clusters matters a lot. And the most successful companies in Latin America and the founders of those companies are now in Uruguay. MercadoLibre, Globant, dLocal, Kaszek, I could go on with the list. When you think about the quality of a cluster, as a predictor of future high-quality new ideas, I get pretty excited about Uruguay. You don’t get that kind of quality anywhere else in Latin America. And what are the drivers of why that cluster is forming in Uruguay? Well, there should be statues for Cristina Fernández de Kirchner in every corner of Uruguay. And secondly, people move to Uruguay to save on taxes. That is true. It is a nice, safe place to live, and everybody likes it. That’s for sure. There is a peaceful environment, which also helps when you want to start a family. But you also save taxes. So Uruguay found this opportunity for itself as a country that welcomes technology entrepreneurs, which helps them save on taxes. As a result, they can do whatever they want with their money, hopefully committing to social causes with the tax savings they make. And suddenly they have a cluster forming. A pool of high-quality talent in Uruguay, from Argentina and elsewhere starting to move there. You have a movement going on. The prevalence of talented people in Argentina and Uruguay is remarkable, even though both countries are small. They produce a lot of high-quality people, because they have great educational systems compared to other countries in the region.

Does it also have to do with the government being more ‘market friendly’, while there is also a shift to the left in the region?

Absolutely. That’s what my comment about the statue of Cristina was referring to. I don’t think Marcos Galperin and Martín Migoya would ever move to Uruguay otherwise. I don’t think they would want to move away from Buenos Aires. They all love Buenos Aires. It’s an amazing city. They moved because they were facing a really hostile political environment. That’s why they moved. One person’s loss is another person’s gain, and I think Uruguay is playing that strategy very well. To attract those people they have to be more pragmatic with business.

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You said that lower taxes play a fundamental role in attracting those founders to Uruguay

In the same way that people who move to Miami from New York. They don’t say they move just because of the taxes. But if the tax rates in New York and Miami were identical people would not move to Miami. That’s pretty obvious.

But what other incentives would you recommend Uruguay implement?

Visas for workers in the technology sector is an easy one. So, if you want to move to Uruguay, this makes it a super easy process. I think the tech community thrives on diversity and inclusion, so also a very oriented social agenda. If you look at the biggest tech hubs in the world, they are very liberal: Silicon Valley or Berlin. They are places where everyone is welcome, regardless of their beliefs. This is very important. I think Uruguay is cheap now in terms of cost of living, but it will change quickly. Real estate is going to get more expensive. Maybe there can be a government policy to make sure that real estate for tech workers is affordable. That’s a smart long-term move. But I think the community-building has to be from the entrepreneurs themselves. It’s not something that the government necessarily has to be involved in. This is something I discussed with entrepreneurs and founders I met with two weeks ago: they need to organize together more, and share information. They are already doing that, but more than that is good news.

What can Uruguayan startups do to access more financing? Should they start to launch in other markets, or even before they launch in Uruguay, given the size of the Uruguayan market?

I can guarantee you that any startup in Uruguay is not about Uruguay. I guarantee you that startups in Uruguay are about Brazil, Mexico or other countries. So Uruguay is just a place to develop the product, because the engineering talent is very high level. It’s not about Uruguay. Maybe Uruguay is a good testing ground, but three million people are not enough to sustain any company. That forces you to go abroad, but you can always have the heart and the development of the company in Uruguay. To attract more money, I think you just have to have great ideas, and with great ideas you have to relate to great entrepreneurs. That’s why I’m an optimist. If you are a young guy in dLocal, MercadoLibre or Globant, having those founders backing you and helping you think about your business is going to increase the probability of success of your idea, and that would make you get more money, because the idea would be better when it reaches venture capital funds.

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Which companies in Uruguay are you looking at and which you see as having potential?

I would say Datanomik is very interesting, the open banking API company that is a spinoff of dLocal. There are some cybersecurity companies that are very interesting as well. Uruguay is becoming a place where financial infrastructure companies are sprouting up more than anything else. It’s very interesting what’s happening in that particular space. Those companies offer some of the best risk rewards for venture capital. They call it the Estonia of South America. The Estonian story is that they create a lot of infrastructure companies related to fintechs. So Uruguay is kind of like that for Latin America. What I haven’t seen yet, but I hope to see, is entrepreneurs from Brazil, Chile or Colombia saying, ‘This is a great place to start, I want to move to Uruguay to start my company’.

How do you see venture capital right now, within this new context of high interest rates?

I think there is a regime change. We were living with super-low real interest rates around the world, and massive money printing. That has finally led to high inflation in developed countries, the highest in 40 years. And in the next decade, average inflation will probably be much higher than during the last decade. And if that happens, volatility will be much higher, which equals more surprises. The problem is not the absolute level of inflation, but how inflation will rise and fall, because it changes a lot how businesses operate. That, in turn, requires higher interest rates, which destroys company multiples. As this last point is not yet well understood by early-stage entrepreneurs - although it is by public market investors - and whatever you are building is not going to reach the same scale it would otherwise. Consequently, the results are no longer as great, and the valuations have to come down. All of this has to go down. At the end of the day, venture capital funds are looking for a certain kind of return. If their great results are not so great anymore, they have to adjust in seed rounds, series A, series B, series C. This process is ongoing and will take time. The delay will last about a year, year and a half. So first things happen in the public markets, and then things happen in the private markets. There are a lot of entrepreneurs who believe that investors are playing games, trying to use this market turmoil to get better terms. That is not at all what I see. Investors are really very concerned about this regime change. And that all their assumptions and premises are going to be wrong, so they will have to adjust for the future. And in that process you don’t see any investment. When entrepreneurs run out of cash, they’re going to have to deal with their reality. They’re trying to stretch their cash by lowering their capital burn, so they’re looking for cash as late as possible, because it’s very difficult to get that cash in a regime change.

Do you think those entrepreneurs who have not understood this regime change are going to end up like Buenbit in Argentina, or Bitso, or the other crypto companies that are laying off personnel? Is it because they didn’t understand what was going to happen?

Everyone writes about layoffs in a negative way. It’s negative for the people who are laid off. I have a lot of empathy for them. It goes without saying. But it’s super positive that action is being taken. I would be much more concerned if they weren’t adjusting and not laying people off. Why? Because that would show that they haven’t understood the regime change. It’s the opposite. It looks bad for them, because they’re having to lay off 10-20% of their staff, but if they don’t, they’re going to hit the wall like a train. By the time they try to adjust, it will be too late. There’s too much inertia. So by taking early action, they’re increasing their odds of survival, just like Amazon survived the dot-com bust. Literally, there was a year when Amazon hardly grew at all. They survived, and then they built an incredible company. The current moment is one of survival, and the companies that have understood that are laying people off.

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But you don’t criticize the companies that spent huge amounts on marketing to accelerate growth, and took on a lot of people with big salaries, and now have to reduce them?

First of all, the salaries weren’t inflated. They are set by the market. There is more demand for people than supply, so salaries went up. It’s that simple.


But there was also a lot of cash injected into the market...

Yes, but it was a factor of labor supply and demand, and that’s what happens. As far as marketing expenditure, it’s obvious in hindsight that it wasn’t smart. Why do I say that in hindsight? It was very, very hard for companies and venture capital to say, ‘No, don’t grow, and let your competitor grow irrationally’. It was hard to see it happen. Big companies are winners, they are paranoid, they don’t want to lose. That’s the trait of most great founders. Now, in retrospect, 2021 was the year to do the complete opposite of your competitors. Save money, raise money, and do nothing. If you had a crystal ball, you would have said, ‘OK, let’s raise money and do nothing’. But that’s hindsight. People didn’t know the party was going to end so abruptly. Now they understand that the party is over, and they have to adjust as quickly as possible to avoid running out of money, and having their companies die. By the way, that will happen often. The survivors will build the businesses. The story of MercadoLibre is amazing. How many marketplaces were there in the 1990s that MercadoLibre was competing with? It was a long list. MercadoLibre is here today because they are the only ones that survived. All the others went bankrupt. Here it is, and they built an amazing company out of that, because they were patient. When the markets reopen, they can think about growing again, maybe in 2024 or 2025.

Do you think something similar will happen with fintechs and crypto?

Absolutely, it applies to literally everything that was negative for cash flow. We are in a time of retreat and survival. Some ideas are so unintelligent that founders should basically abandon them altogether. This is a great time for entrepreneurs to say, ‘That was stupid, let me do something else with my life’. That will happen very often too.

How much M&A activity do you think we’ll see this year and in 2023?

Much more than before. People think they will get real money for their businesses. They are in for a big surprise. Most of the companies that have run out of money will sell for next to nothing. Because the alternative is zero, and the buyer knows it. That’s the way it is.


How long do you think this moment will last, and when do you think we’ll see the next cycle of investment?

In the US, the venture capital sector represents 1.75% of GDP, but it will tend to increase in the coming decades. Eventually, this way of creating new companies will reach 5% of GDP. I don’t know if it will happen in 10 or 20 years, but it will increase. However, in the next 24 months it will go down. In Latin America the percentage is 0.3% today, and in the long term it will also go up. My crystal ball prediction is that we will come out of the slump and start growing again in 2025. By 2025 everybody will understand what valuations are like, what companies are like, entrepreneurs will have adapted, and they will start growing again. But it could be another 10 or 20 years before we see another 2021. It was like 1999. A lot of irrational things happened, but if you were on the inside, you didn’t see it as clearly. Rounds of 100-times revenue, companies with $500 million in revenues being valued at $1 billion. That was happening left and right, even in Latin America.

Translated from the Spanish by Adam Critchley