Untapped Innovators — Puerto Rico
Aligning with my commitment to support underrepresented founders, I’m excited to highlight innovation in Puerto Rico! Puerto Rico is home to one of the most promising and resilient startup ecosystems in Latin America.
My amazing internship at Precursor Ventures was highlighted not only by the amazing team but also by the projects I got to tackle. Along with developing my investment thesis, I had the pleasure of exploring a startup ecosystem not currently on the firm’s radar. Through research and interviews with active investors, I will cover the opportunities and challenges entrepreneurs face on the island. I also examine the state of the market, draw attention to key industries, and feature how to get involved in this region.
The Lay of the Land
While the main entrepreneurial ecosystems on the island are in San Juan, Mayaguez, and Ponce, I focused on Puerto Rico (PR) as a whole. With a population of just under 3 million people, PR is about 4x as populous as DC and covers as much land as Connecticut. With over 70% internet usage and a 92% literacy rate, their highly educated community generates an annual GDP of over $100 Billion. Still, startup financing is very limited, with only $14M deployed in 2019.
Looking back, the Puerto Rican startup ecosystem has scaled exponentially in the last several years, along with the growth of the Puerto Rico Science, Technology, and Research Trust. This NGO is the driver of the island’s public policy around technology and innovation. In 2015, they launched parallel18, a performance-driven international startup program with a social mission: offer entrepreneurs from all over the world access to high-quality business training.. Since its launch, there has been significant growth in every metric related to innovation, including available grants, companies launched, number of investors, and capital invested.
The numbers might seem clear-cut, but there are two stories in PR. On one hand, this territory is seeing an entrepreneurial boom. On the other, the island is still recovering from major setbacks in the last decade. Puerto Rico’s hardships started long before the pandemic. Described as the worst natural disaster to hit the Caribbean, the island was hit by Category 5 Hurricane Maria in 2017. Only 2 years later, the island was hit by a swarm of earthquakes, 11 of which were at a magnitude greater than 5. If you’ve ever heard that necessity breeds innovation, PR is the perfect case study.
I am not an expert on this ecosystem, so I wanted to interview leaders in this space to get an inside look into what’s happening on the ground.
I first spoke with Lucas Arzola, Founding COO of parallel18 and Investment Director of P18Ventures, the program’s investment arm. Lucas has led operations for the pre18, local preaccelerator program and the P18, international accelerator program, advising 250+ startups and overseeing $11M+ in startup grants. Before parallel18, he founded a university startup incubator, a biotechnology startup, and an education startup.
I was also grateful for the opportunity to speak with Erika Medina Vecchini, Managing Director of Endeavor Puerto Rico. Endeavor is a mission-driven global organization leading the high-impact entrepreneurship movement that transforms the entrepreneur ecosystem in Puerto Rico by integrating its founders in a global community of high-impact entrepreneurs. After getting her bachelor’s and master’s degrees in the United States, Erika returned to Puerto Rico in 2017. She remains fully committed to leveraging Endeavor’s global network to engage entrepreneurs in thinking global and position Puerto Rico as a competitive destination to do and grow businesses.
“B2B companies do well–there are not many degrees of separation from your client” — Lucas Arzola
Both Erika and Lucas emphasized Puerto Rico’s strategic positioning as a key benefit. Puerto Ricans benefit both from the Latin American culture and the United States’ trade, patent, and financial protections. Paired with Puerto Rico’s geographic location, the island is the perfect region for Latin American companies looking to expand to US-Hispanic markets and for US companies looking to expand to Latin America.
Even further, PR has a business-friendly environment. Not many places in the world can offer a return on investment the way this beautiful island does. In 2012, Puerto Rico created two important tax laws: Act 20, the Export Services Act, and Act 22, the Individual Investors Act. The goal of Acts 20 and 22 was to attract entrepreneurs to the island with tax incentives for establishing businesses in Puerto Rico. Then, in 2019, the two acts were merged, overhauled, and renamed Act 60. These recent regulations provide 100% tax exemptions on capital gains for resident individuals. Under Act 20, local corporations of any size that export goods or services from Puerto Rico pay a low PR tax rate of 4% while enjoying a 0% Federal income tax rate. If the tax incentives aren’t enough, entrepreneurs also benefit from a bilingual workforce.
Last but not least, Puerto Rico has a superior quality of life. No matter where you are on the island, you’re never more than 40 miles from a beach! Given these factors and lower labor costs, it’s no surprise that there is a significant enterprise presence on the island.
“Remote work helps, but recruiting technical talent is still an issue — it’s hard to compete globally.” — Erika Medina-Vecchini
Ongoing recovery from recent hurricanes and earthquakes remains a challenge, but access to technical talent is the most significant obstacle reported by tech founders in PR. In a 2018 Study by Endeavor, 58% of tech founders interviewed indicated that access to talent was a serious or very serious challenge. Especially since Hurricane Maria, many young professionals have left the island to pursue graduate school and job opportunities on the mainland. Even before the Hurricane, it was estimated that of the 22,000 STEM graduates that graduate annually in Puerto Rico, as many as 60–70% leave the island in search of better opportunities.
Many founders cited difficulties raising funds to pay for talent and difficulty competing with US-based companies that can offer better compensation packages. To mitigate this, the community is looking into programs to incentivize people from the diaspora to return to the island.
Along with recruiting human capital, founders also struggle to acquire financial capital to scale their businesses. Despite high rates of grant funding, the investment rate remains low. Erika highlighted that most investments in local tech companies come from organizations based in Puerto Rico. Funding from investors based abroad or in other parts of the United States is much more fragmented.
In tech sectors across the world, local companies that reach a significant scale are responsible for a disproportionate amount of productivity. This is also the case in PR. However, less than 20 startups have grown to 100 or more employees.
Both experts also underscored a shift for entrepreneurs over the last 5 years from a local mindset — Puerto Rican entrepreneurs are finally starting to think globally. Parallel18 pushes this effort forward by accepting companies from around the world into their accelerator and by nurturing local companies ready to scale their impact. Endeavor Puerto also plays a role in this shift, only working with Puerto Rican companies that export products or services. During times of hardship, startups that were only focusing on the PR market were forced to think more globally because their only market would get ruined overnight. Erika shared a story about a local founder who lost power during the Hurricane but still managed to go after clients and close deals. Necessity breeds innovation.
According to the Startup Universal Guide, Healthcare has generated over 25% of the island’s GDP for the last four decades. Notably, 5 of the world’s top 10 best-selling medicines were manufactured in Puerto Rico. A highly educated workforce, established supply chain and service providers, and unparalleled tax incentives make this an ideal location to manufacture and export medicine and medical devices. More recently, local startups focused on healthcare software and pharmaceutical innovations are leveraging their proximity to a high density of pharmaceutical companies and a huge life sciences market to thrive.
During the first half of the 20th century, the agriculture of sugarcane and coffee was the main driver of the Puerto Rican economy. Since the 1950s, government policies focused on industrialization deemphasized agriculture, diminishing its contribution to the island’s GDP to 1%. While 85% of all food consumed on the island is imported, increased awareness for eating locally from producers and restaurateurs sets the stage for this industry’s resurgence. The growing interest in this market segment is reflected in both the startup and investment scene. On the startup side, PRoduce is a multi-platform marketplace for local produce. It aims to connect local producers with buyers, including chefs, restaurants, hotels, and direct customers, to decrease the Island’s imported goods. On the investment side, Semillero Partners was founded in 2016 to drive growth and innovation across the Food & Beverage, Food Tech, and Wellness Industries.
Along with being the parent organization of parallel18, the PR Science, Technology and Research Trust is also the parent organization of the entrepreneurship program Colmena66.
Grupo Guayacán is a dynamic nonprofit organization dedicated to the education and development of local entrepreneurs with the ultimate goal of helping Puerto Rico’s economy grow. They support companies at all stages — from idea to growth.
Centro Para Emprendedores was established in 2012 as a response to a growing need for entrepreneur mentorship programs. This non-profit organization is focused on providing marketing, research, and planning services to new and existing businesses.
Morro Ventures is Puerto Rico’s first institutional early-stage venture capital firm investing in technology companies across Latin America that leverage Puerto Rico as a platform for growth
Aurora Angel Network is an angel network founded in 2019 to connect startups with investors interested in providing seed capital and advisory services
While Puerto Rico has experienced tons of challenges, the community infrastructure is now in place to nurture local entrepreneurs. Today, these startups are getting better access to the resources and capital necessary to scale their businesses. Nonetheless, recruiting technical talent remains the largest challenge for founders.
Endeavor’s 2018 Study makes clear how to best move forward. Since local support organizations place most effort on early-stage companies, there needs to be a greater focus on helping high-growth companies to find, train and retain talent as they expand.
Homegrown Puerto Rican companies raising large rounds of financing (and eventual successful acquisitions/exits) will be a key milestone to validate the local innovation ecosystem.
“There’s a significant push for Puerto Ricans to be entrepreneurial. Crisis leads to opportunity, and we are seeing more people generating local solutions that can also be relevant to international markets.” — Lucas Arzola
To be successful in Venture Capital, you have to be willing to look where other people aren’t. You have to see opportunities where others don’t. It’s still the early innings of this transformation, but that’s exactly why I wanted to highlight Puerto Rico.
My VC Journey is far from over, and I’ll continue to share my learnings. If you’re interested in staying updated, follow me here on medium and on Twitter @darrensvision