What are the legal challenges to have more unicorn startups in Mexico?
The success of a startup is largely determined by the time and dedication that entrepreneurs have to develop their company.
In recent years, Mexico has positioned itself as a prosperous territory for the birth and development of startups , clear examples of this are Kavak , Bitso and, recently, Clip . However, we still face various challenges, especially in legal matters, which if overcome could turn the country into a hotbed of companies valued at more than a billion dollars , known as unicorn companies.
According to Víctor Aguirre López, founding partner of the firm BlackBox Startup Law , a law firm specialized in startups, the pandemic played a key role in the growth of these companies in Mexico. This is due to, on the one hand, the adoption of new digital products and services helped them to add users, and, on the other, important investment funds have decided to bet on national startup projects.
“Although recent reforms, such as the one related to labor outsourcing, are laying the foundations for the growth of startups in the country by giving investors certainty, it is also necessary to implement a regulatory framework that simplifies the large tax burden that implies for an entrepreneur to start his project, ”said Aguirre.
Mexico is the second most prosperous country in Latin America for the development of startups and is among the top 5 in Latin America, according to the report The GovTec Index 2020 , prepared by CAF Development Bank of Latin America and Oxford Insights, which considers three reference variables: digital startups, government policies and the procurement system.
The aforementioned document also suggests that the most digitized cities have a greater capacity to take advantage of new trends and, with this, trigger the birth of new startups and the growth of existing ones. The document indicates that Buenos Aires, Mexico City and São Paulo are the three cities with the greatest development potential for the startup ecosystem in Latin America.
In the words of Víctor Aguirre, the success of a startup is largely determined by the time and dedication that entrepreneurs have to develop their company. Therefore, it is essential to have specialists and simplified regulatory frameworks to help them focus their efforts and resources on growing their business.
Thus, although the outlook for startups in Mexico looks promising, important challenges must be overcome. The BlackBox specialist highlights three main ones:
Adjustments in taxation. To promote the development of startups, it is essential to move to more flexible tax schemes, especially during the first year of the company's life, which allow laying the proper foundations for a solid company.
In the United States, for example, taxation is friendlier to entrepreneurs and encourages their development: new companies only file their annual return during the first year. In Mexico, on the other hand, new companies must file provisional monthly returns in addition to the annual one.
"Reducing this administrative burden will have important benefits for companies, because in addition to making tax work easier, it allows them to take advantage of time in other aspects that are equally important for the business," said Aguirre.
It also points out that, in tax matters, it is essential to encourage strategic investment throughout the country, through the forgiveness of taxes or programs that promote technological development. An example of this is what is implemented in New York, where, if a startup is established in the state and partners with a local university to develop its project, it is exempt from paying taxes for 10 years. This benefit is significant, as it allows the emergence of new ventures, while benefiting the community and retaining talents.
New schemes for social security. The BlackBox lawyer also proposes specialized social security schemes for startups and entrepreneurs, since this aspect represents a great challenge for new businesses, especially in terms of procedures and costs.
Given this, it proposes a three-year temporary scheme to reduce costs and simplify social security procedures, so that startups would not exhaust their resources and could more efficiently comply with these requirements.
Simple and accessible procedures for the creation of new companies. The notarial cost of creating a business in Mexico is extremely high. On average it is five times higher than in the United States, which becomes an important limitation for entrepreneurs to start their project.
In addition, these procedures are often complex and full of legal technicalities.
For this, it proposes the drafting of less extensive documents, notarial discounts, payment facilities and lower fees for startups, all measures that, combined with a comprehensive strategy, allow to take advantage of the entrepreneurial potential of Mexicans.
“They are documents of up to 20 sheets, but there really is no value in having such voluminous documents; on the contrary, this is also an obstacle to promoting the creation of new projects ”, Aguirre points out.