While Latin America is regaining appeal for startup investment, Ecuador remains off the radar for Venture Capital (VC) for the time being. Excessive state regulation deters capital and hampers the growth of the entrepreneurial ecosystem, thereby preventing the country from capitalizing on the global interest in Latin American innovation. The issue extends beyond capital access—it reflects a systemic problem that stifles entrepreneurship in Ecuador, leaving startups struggling to survive in a competitive global market.
Despite the growth of risk capital in Latin America, Ecuador continues to fail to capture the attention of venture capital (VC) investors. While Colombia has positioned itself as the second most attractive destination for these funds, Ecuador still lacks a solid ecosystem to attract investment. For entrepreneurship in Ecuador to thrive, the country must address fundamental policy and economic constraints that deter investors.
Venture Capital, or risk capital, is a form of financing in which investors provide funds to high-growth potential startups in exchange for equity. This type of investment is crucial for developing technology companies that require significant capital in their early stages. Without access to VC, entrepreneurship in Ecuador remains fragile as startups struggle to secure the necessary resources to scale their businesses effectively.
Latin America’s VC Investment Landscape
According to the VC Report 2024 by Endeavor and Glisco Partners, venture capital investment in the region fell by more than 80% between 2021 and 2023 but rebounded by 30% in the first half of 2024. However, Brazil, Mexico, and especially Colombia are the countries capitalizing on this recovery, which now captures 29% of VC capital in the region. Ecuador does not appear on the list, highlighting its marginal role in the regional investment ecosystem.
Despite having a unicorn like Kushki, Ecuador has been unable to replicate these success stories. According to economist Andrés Rodríguez, the main problem is a state that does not facilitate but overregulates and imposes obstacles to innovation. The lack of regulatory clarity and incentives discourages investment, forcing Ecuadorian entrepreneurs to seek opportunities in other countries.
What Is Colombia Doing Better?
Colombia has managed to attract more investment in startups due to several factors:
- Clear public policies to attract investment in technology.
- Public-private co-investment funds that foster startup growth.
- Tax incentives and access to international markets.
- A solid ecosystem with accelerators, incubators, and available capital at all stages.
This has allowed the average size of investment rounds in Colombia to be 3.5 times larger than in other countries in the region, demonstrating investor confidence. The country’s ability to foster entrepreneurship and create an environment conducive to VC investment has strengthened its innovation ecosystem.
The Colombian fintech sector secured $405.4 million in venture capital in the first half of 2024, with startups such as Nu Colombia and Simetrik standing out. The United States was the primary investor, contributing over 38% of the capital. This demonstrates that international funds view Colombia as a viable destination for technology-driven investments, a status that Ecuador has yet to achieve.
Ecuador Needs Clear Rules and Investment
Ecuador, on the other hand, lacks:
- State policies to foster Venture Capital.
- Financing programs that facilitate startup growth.
- An attractive investment ecosystem for international funds.
Instead of encouraging investment in innovation, the state imposes bureaucracy and barriers that make access to capital difficult. Without clear rules and legal security, investors opt for other countries with better conditions. The challenges in entrepreneurship in Ecuador are deeply rooted in a regulatory framework that fails to incentivize innovation and risk-taking.
Colombia has implemented favorable regulations for startups, including regulatory sandboxes. These policies enable companies to test innovative products and business models without immediately facing full regulatory consequences, creating a nurturing environment for fintech and other high-tech startups to experiment and grow.
In contrast, Ecuador passed the Organic Law on Entrepreneurship and Innovation in 2020, which mentions venture capital funds; however, it still faces challenges in its effective implementation. The regulatory hurdles remain a significant obstacle, and many startups struggle to navigate the complex legal landscape.
Entrepreneurs developing a fintech platform in Colombia can access a regulatory sandbox to test their product in a controlled environment and receive feedback from authorities. Additionally, they can access multiple active Venture Capital funds in the country. In Ecuador, the same entrepreneur would face a stricter regulatory environment and fewer financing options, making it harder for their startup to grow.
“These differences highlight the need for Ecuador to implement more favorable policies to attract investment and foster technological entrepreneurship,” said economist and entrepreneur Carla Pérez. If Ecuador is serious about developing a thriving startup ecosystem, it must create conditions similar to those in Colombia and Mexico.
Startups Fail Within Three Years
Ecuador faces significant challenges in technological entrepreneurship. It is estimated that approximately 80% of startups in the country fail to survive beyond their third year of operation, primarily due to a lack of profitability and inadequate financing. This high failure rate reflects the broader economic instability and lack of support for emerging businesses.
Additionally, there is a considerable gap in the training of technology professionals; each year, approximately 9,000 technology experts are needed, but Ecuadorian universities graduate only 100 to 200, limiting innovation and sector development. This talent shortage further weakens the country’s ability to develop a robust entrepreneurial ecosystem.
A study by EAFIT University in Colombia concluded that companies financed by venture capital are significant job creators and drivers of economic growth. Specifically, venture capital-backed companies tend to experience faster revenue and employment growth compared to those that do not receive such funding. Additionally, these companies typically achieve higher sales volumes and lower bankruptcy rates, suggesting that venture capital drives business growth and contributes to economic stability and job creation.
Ecuador misses out on all these benefits. On average, its economy has grown by less than 2% over the past decade, which explains the country’s increasing informality and unemployment rates. A lack of entrepreneurship in Ecuador means fewer startups reach maturity, resulting in fewer job opportunities and reduced economic diversification.
The Path Forward
For Ecuador to revitalize its startup ecosystem and attract venture capital, it must prioritize key reforms:
- Regulatory Improvements: Simplify and clarify regulations to make it easier for investors and entrepreneurs to navigate the legal landscape.
- Tax Incentives: Implement tax benefits for startups and investors to encourage investment in innovation.
- Public-Private Partnerships: Foster collaboration between government institutions, private investors, and international funds.
- Investment in Education: Expand university programs to produce more qualified technology professionals.
- Accelerators and Incubators: Develop programs that provide mentorship, networking, and capital access to support early-stage startups.
By addressing these challenges, Ecuador could position itself as a competitive destination for venture capital and high-growth startups. Otherwise, entrepreneurship in Ecuador will continue to lag behind its regional peers, and the country will miss out on the economic benefits that a thriving innovation ecosystem can provide.