Part II: “Diversify or Die” – is part of code of survival for startups in Costa Rica
By Patrick Haller
In Part II of a series, we take a deeper look at the startup culture of Costa Rica. Despite bureaucratic hurdles and limited access to capital, there are numerous success stories here. Getting up and running often requires that firms diversify their services base and figure out a way to become profitable from the start. We talked to four services firms – that managed to thrive in a less-than-nurturing environment.
Qualified Workforce, Limited Options
“In the past,” said Isthmus COO Tomas Rodriguez, “we were doing a lot of things but we decided to focus on Microsoft.net, RPGAS400 and QA testing.” The company offers Microsoft.net and QA for US clients and RPG for Costa Rican clients and plans to expand across Central America and South America by the end of 2012.
In addition to Costa Rican employees, Isthmus hired people from other countries in order to create a culturally diverse environment. Rodriguez said that the immigration procedures are very well established and relatively easy. The 40 member staff has worked in over ten verticals including food, banking & finance, software development, mobile apps and fashion.
“We are creating smaller teams,” he said, “In Costa Rica you are able to provide a very qualified workforce, but the issue is scalability. We have faced some competition from US companies, but the IT industry is not that affected because companies like P&G are hiring engineers, and call centers hire tech support.”
Although many IT professionals go to work for a multinational, Rodriguez observed, “Once they have been there a while they are willing to see what else is available. I have worked for Intel, it is a great company with a great environment, however all the things you do there are very unique and particular.” This specialization can limit creative and professional growth whereas working for a startup, or a smaller, established firm, requires that everyone work together, and in different capacities.
Pioneers Climb a Hard Road
When Pablo Barrantes and Steven Guzman started InterGraphicsDESIGNS in 2001, Costa Rica was a desert for entrepreneurs, and they were true pioneers, much to the dismay of their mothers, who “didn’t believe in that from the beginning.” The women were not alone in their incredulity, “One thing culturally people are taught from the beginning is that you need to be a nice employee because you have obligations, but no one is teaching you that you can have your own company. When I started the company an advertising agency offered me a huge salary and I told them that I was starting my own company. I told my brothers and sisters that I had this other offer and I could see in their faces that they thought I was stupid for not taking it,” recalled Barrantes. Ricardo Arce, a developer who became a co-owner of the company in 2004, expressed a similar experience. Starting out as a freelancer working from home (his parent’s home), his mother would tell him to ‘get a real job.’ “Even now, after nine years, she still thinks this is not the best way to get a job in our country.”
Barrantes remembered how during the first two years he and Guzman worked all day, every day. Sometimes they would sleep in the office and stay through the weekend. “We made a lot of sacrifices to make it work, then we realized we were going to die if we kept this rhythm.” They decided to hire people and grew the staff 100% for every year during the next four years. “We now we have 35 people, but thankfully we have a more a professional growth system that is focused on the plans we have.”
Barrantes explained that most of their work came from referrals, which led to more complex systems of marketing through the website and business developed organically. Afterwards, they started participating in fairs and conferences to create a network.
Arce observed that in Costa Rica, it is “very hard to do a small thing with a bank or the government.” For example, getting a loan can take months and navigating governmental bureaucracy takes much longer. “Even companies from US and Canada always say that,” Arce reported. “The other challenge specific to our business is that we have a lot of competition for clients. All the web design companies in Costa Rica have a lot of work, but there is competition for human resources.” When companies like HP need good developers, the salaries increase because companies are vying for the best talent.
According to Barrantes, the universities have incubators for tech projects, and as a teacher of graphic design/digital media, he always try to tell his students that they have the power and capabilities to have their own business if they want.
Of Employees, Locality and Ability to Scale
Mario Merino, General Manager at MapMemory, a geographical information system designed for business intelligence, is well-familiar with the challenges to having a successful startup in Costa Rica. As an active player in the sector since 2003, Merino has been involved with the genesis of at least two startup ventures and has done consulting and development for other companies there.
The first obstacle Merino cited was the lack of a secondary market, “So the startups here and in the region focus on profitability from day one because there really is no exit strategy,” he explained. “They won’t go the IPO route because the secondary market is so unsophisticated. You focus on building a profitable company and build a company that can run itself.” In the States, Merino said, there are other things you can do before making money.
The startup mentality in-and-of-itself poses a challenge since it is hard to find young employees willing to work for very little money with the goal of eventually cashing-out. “Companies can’t expect to have an inexpensive workforce, working all hours and living in a commune type setting,” Merino stated.
“The web is hyper-local,” declared Merino, “You have to tailor your app for the local market and modify it for the world.” He cited as a good example Junar which started development in Chile and Costa Rica, but the founder is in California. “It boosts your probability of success if you first have a test group, which is usually hyper-local. If I am developing an app for the global market, I still have to start hyper-locally. We have the hindrance of not being in a large market which could be a barrier to having a successful startup.” Merino pointed out that innovative drive is not lacking, but it is geared toward corporations.
“Since you don’t have scale, it poses another obstacle to there being a startup culture,” said Merino, “you can’t really focus on acquiring a large user base which is sometimes more valuable than a product. Facebook, for example, leverages the number of users they have, not the product.”
Diversify or Die
Manrique Ulloa Steinvorth, General Manager of ieSoft is encouraged by what he has been recently seeing in Costa Rica, “People are now beginning to see the possibilities; ten years ago they didn’t see the possibilities – they were in a bubble and the market was limiting.” He used US companies like Facebook and Twitter as inspiring examples of companies that start very small and then become big successes. This, Steinvorth said, is a goal that everyone has. Even so, “Costa Ricans prefer to work for an international or local company that offers good pay as opposed to a startup.”
However, technological advances have enabled new Costa Rican entrepreneurs to develop companies around them. “Through the years local software companies have learned to diversify as new technologies have emerged.” ieSoft has developed applications around social media and file sharing to build cost-effective software solutions that “make use of stable, well proven secure technology platforms.”
Steinvorth started ieSoft in 2006 to specialize in .net development focusing on a windows model application. With mainly local clients in agriculture, legal and wholesale shipping, ieSoft seeks to provide services to the US through the IT Innovation Group, a consortium Steinvorth co-founded in order to collaborate on projects and expand access to clients. “Instead of competing for the same opportunities, we can get together and try to offer a whole solution,” he explained.
Each company has a niche and services are presented as one package in order to offer a whole solution. “If a project needs ten developers and I only have five, I will search within the consortium for a partner that can provide the other five, and the company that brings the project will manage the project.” Currently the consortium has five members, but they are always looking for new companies to join.
ieSoft is currently involved with a migration project for a US company, and they are working on creating a package of services to bring to the US for distribution/wholesale companies. Steinvorth observed that many Costa Rican software companies are product or service companies, with only a few, like ieSoft, offering hybrid solutions. “These companies know that in order to compete with other software companies based in Colombia, Argentina, Chile, México, we need to diversify or die,” he stated. A competitive advantage in these countries, according to Steinvorth, is that software companies get help from their governments whereas the Costa Rican government does not offer assistance. “This makes it more difficult to compete with companies that have these kinds of certifications (like CMMI) and also when US companies are looking for these types of companies and certifications, which are a key factor in deciding which company to choose.”
Startups Suffer a High Mortality Rate
“One thing to understand is that being an entrepreneur is not for everybody,” concluded Barrantes from InterGraphicsDESIGN, “they have to have a different type of brain with some talent to suffer a little more than others. It is not easy, many people are trying but the mortality rate is high due to a lack of money, a bad idea or a lack of character to keep doing it. Sometimes we have people seeing us being entrepreneurs and they go out and want to do their own thing. It is great to see it, because it is what is supposed to happen. And you cannot bury anyone’s dreams.”