Before Carlos Garcia Ottati moved from Colombia to Mexico City for work back in 2012, he had an experience he would rather forget.

“In the process of selling my car, I got defrauded. It was terrible,” recalls the 38-year-old tech entrepreneur. Then when he tried to buy a car while living in Mexico City, he was defrauded again, mistakenly buying a car with mechanical issues.

“That created a level of curiosity in me to understand how many people were going through this issue,” says Mr Garcia Ottati. After some market research, he discovered that 90% of used car transactions in Latin America (LatAm) happen informally, and 40% of them end up in fraud.

“You can go through tragedies, like being killed or kidnapped, or losing a great deal of money, like what happened to me,” he says. “That was simply unacceptable.”

In 2016, Mr Garcia Ottati left his executive role at Mexico City-based e-commerce platform Linio to set up Kavak, an online marketplace that aims to improve transparency, safety and access to financing in the used-car market across LatAm. 

In September 2020, Kavak became Mexico City’s first tech ‘unicorn’, or start-up valued at more than $1bn. A year later, the used-car platform raised $700m of funding at a valuation of $8.7bn.

Surging funding

Kavak’s story is one of many start-ups based in Mexico’s capital, where tech is being used to build trust, security and convenience in lumbering economic sectors. As this new generation of entrepreneurs tackle pervasive problems in everything from financial services to the housing market, investors are taking notice.

Start-ups in Mexico City have raised a record $2.84bn of venture capital (VC) funding in 2021 to date, making it second only to São Paulo across LatAm, according to data provider PitchBook. This is noticeably higher than the full-year total of $832m for 2020.

For Mexico City-based investors, this is a remarkable change from a decade ago, when just $25m was invested by VCs across the country, according to the Mexican Association of Private Equity and Venture Capital Funds.

“[In 2011] there wasn’t even a name for venture capital in Spanish,” says Alejandro Diez Barroso, a former tech entrepreneur who now serves as the managing partner of Dila Capital, a Mexico-City based VC firm. 

“Today our portfolio companies in our third fund are on average raising the same amount as the entire VC industry in 2011.”

Funding has skyrocketed, in part thanks to the entry of major global investors, such as Tiger Global and SoftBank, along with dedicated regional funds like Kaszek Ventures. 

SoftBank, the deep-pocketed Japanese tech conglomerate, launched a LatAm fund in 2019 and has backed Mexico City start-ups such as Clip, which in June 2021 became Mexico’s first payments unicorn. In September, SoftBank raised another $3bn tech fund to invest across the region.

Even with plentiful funding, Mr Diez Barroso says that there is still a need for more capital from domestic pension funds, which typically do not invest in VC, start-ups or initial public offerings.

“In Mexico there’s a problem where a lot of the concentration of institutional capital is in the hands of a few people,” he says.

Linio Mafia

Another major catalyst for Mexico City’s booming start-up ecosystem was e-commerce platform Linio, which exited in 2018 after being acquired by Chile-based department store operator Falabella for $138m. 

Many former employees, including Kavak’s Mr Garcia Ottati, left Linio to set up new ventures, bringing with them expertise on how to scale and expand businesses to other countries in LatAm.

“We are called the ‘Linio Mafia’,” says Lorena Sánchez Garcia, Linio’s former chief commercial and operation officer, who now is the Mexico director of Founder’s Institute, a pre-seed start-up accelerator.

“We started creating a new ecosystem for the second round of start-ups like Kavak and Flat. There’s a lot of very basic services still missing in Mexico which need to be solved,” she adds. Combined with the entry of foreign tech companies, such as US ride hailing app Uber and Colombian delivery platform Rappi, the Linio Mafia has created a new pool of entrepreneurial talent in the city.

Flat, a start-up that has built a platform to improve the fraught process of buying and selling a house in Mexico, was founded in 2019 by Linio’s co-founder, Bernardo Cordero.

“The housing market simply doesn’t work,” says Mr Cordero, who highlights issues such as the lack of public information on house prices and that it typically takes more than a year to sell a property. 

He notes that the size of Mexico City, which has a population of more than 21 million people, and the newly found consumer willingness to adopt digital solutions, makes it a very attractive place to launch tech businesses.

“Customers are starting to get used to a lot of these solutions in e-commerce, logistics and payments. Everything that is going on in fintech is starting to transfer to more complicated solutions like real estate,” explains Mr Cordero.

Fintech reigns

Like other emerging markets, fintech has become a leading vertical within Mexico City, as tech entrepreneurs have disrupted a large traditional sector.

“When you have such a big sector of the economy, like financial services, it is primed to become an opportunity to create a lot of value,” says Gerry Giacomán Colyer, the co-founder and CEO of Clara, a Mexico City-based start-up that provides corporate credit cards. 

Pablo Pedrejón, a principal at Seaya Ventures, which has just raised a $125m LatAm fund with Cathay Innovation, agrees that fintech is a huge opportunity. Seaya has invested in several Mexican fintechs, including Guadalajara-based Kueski and Mexico City-based financial gym platform Coru.

“Regulation in Mexico and other LatAm countries has been pretty pro-start-ups in the last few years,” says Mr Pedrejón, highlighting fintech sandboxes as an example. 

“But there is still a lot of red tape that needs to be cut,” he adds. “On a local level, start-ups face a lot of problems, dealing with corruption and legacy institutions that are not open to work with them.”

For start-ups founded elsewhere in Mexico, setting up a presence in the capital’s ecosystem is a necessary step to grow. 

“You really have to be there for the talent and the market,” says Juan Leano, the founder and CEO of Parco, a Guadalara-based parking payments start-up that set up an office in the city.

As more and more start-ups emerge from and move to Mexico’s capital, global successes could be on the horizon. Kavak, which has already expanded into Argentina and Brazil, is now eyeing opportunities further afield.

“Our ambition is to become global, focused on emerging markets,” says Mr Garcia Otatti. “We want to focus our time in places where we believe that we can make a dent and our product is designed to help people.”

The interview with Kavak's CEO Carlos Garcia Ottati was originally recorded as part of Rising Ecosystems, fDi's regular start-up podcast. This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine.