Listen to the podcast:
With strong high-tech human resources, the longer-term economic prospects for Argentina are strengthening, notes this opinion piece by Wharton management professor Rahul Kapoor and Ignacio Pena, founder of Surfing Tsunamis. Their view is supported by the World Bank, which notes the country is undergoing an “economic transformation that promotes sustainable economic development with social inclusion and integration into the global economy.” For Kapoor and Pena, digital transformation in areas like finance will usher in the new era. At the moment, however, the nation is suffering a rough patch. A surging U.S. dollar is playing havoc with its interest rates and the central bank pushed the key rate from 27.25% to a stunning 40% recently to support the peso. Even that was not enough to stem the run on the currency, and last week the government requested aid from the International Monetary Fund in the form of a $30 billion credit line. For many Argentina watchers, this is a disconcerting reminder of the nation’s long history of financial crises. But there is another side to Argentina’s economy. The bigger picture, the authors suggest, is of a “new generation of leaders and entrepreneurs” looking to “transform corporations to avoid obsolescence” with exciting new startups and the general growth in high-tech.
Creative Destruction in the Land of Tango
Technological change, innovation and entrepreneurship are transforming the global economy at an unprecedented pace, a process that the famous economist Joseph Schumpeter referred to as creative destruction. This transformation is being led by entrepreneurs carrying the flag of disruption, by established firms reinventing themselves in the face of disruption, and by leaders and policy makers that perceive the opportunity to leapfrog into the future.
Argentina is an extremely fertile ground to see how the process of creative destruction is unfolding in an environment of seemingly unsurmountable challenges. The country has had a long history of populism, closed markets, high levels of inflation and financial crises. Below the surface of this challenging environment, however, lies a vibrant and growing entrepreneurial ecosystem involving hundreds of technology startups, many of whom have already achieved global recognition for their innovativeness and potential for growth (e.g., MercadoLibre, Satellogic, Semtive), and the largest venture capital fund in Latin America (Kaszek Ventures). Policy makers are encouraging entrepreneurship and stimulating competition, and large traditional incumbents are responding to the winds of change by pursuing new technologies and business models.
We designed a course to provide students with a real-time exposure into the process of creative destruction that is unfolding in Argentina. The objective was to evaluate the forces and players transforming key industries, and to identify the conditions and strategies that can accelerate or delay disruption and the emergence of a new economic order. To provide a deeper understanding of the drivers of industry disruption, we focused on three industrial sectors — energy, finance and food — that are not only undergoing major transformation worldwide but are also critical drivers of the Argentine economy, and a hotbed of entrepreneurial activity by local start-ups and incumbents. We interacted with 21 entrepreneurs pursuing new ventures in these sectors and 12 senior executives from established organizations that are adapting in the face of disruptive change. We also interacted with seven senior government officials involved with the central bank, and ministries in energy, agriculture, science, technology and Innovation, which are orchestrating policies to accelerate change and economic growth.
“Argentina is an extremely fertile ground to see how the process of creative destruction is unfolding in an environment of seemingly unsurmountable challenges.”
The finance sector worldwide is on the cusp of major transformation through the emergence of new modes of digitally enabled payments and transactions. We saw clear evidence of such transformation taking place in Argentina via an emerging online commerce giant, a vibrant fintech startup ecosystem, a rejuvenated central bank, and even the traditional incumbent banks. In a country that has one of the smallest financial systems in the world as a percentage of GDP (14%), some of the world’s highest interest rates, and where nearly half of the population is unbanked, the opportunities presented by digital technologies are tremendous.
MercadoLibre, Latin America’s version of Amazon and Alibaba, is an online commerce powerhouse with a market capitalization of $15 billion that has increased three-fold in the last two years. Having democratized commerce by enabling over 40 million active users to sell and buy products in their platform, MercadoLibre now has set out to democratize finance. After years of facilitating payments to its users through its subsidiary MercadoPago, the company is now deploying a host of services that replicate the best of what is available around the world in payments, credit and even savings. These include enabling mobile payments like with Alipay or WeChat Pay, and deploying magstripe readers and financing vendors like Square.
The fintech revolution is also spreading quickly through the startup ecosystem. NXTP Labs, one of the leading accelerators in the region, active in six countries and with a portfolio of over 180 startups, is nurturing a new generation of fintech and agtech startups. These include 123Seguro, the largest online insurance broker in Argentina, Mexico and Colombia, which is growing over 50% per year with an admittedly simple offering, and Afluenta, a peer-to-peer lending platform serving Mexico, Peru, Colombia and Argentina, and now expanding into Brazil, Chile and Uruguay.
Buenos Aires is a hotspot for innovations powered by blockchain. One of the local hubs is the Bitcoin Argentina building, that hosts ten blockchain startups and is the creation of a group of entrepreneurs led by Diego Gutierrez Zaldivar, who years ago began organizing meet ups in the city and across the major cities in Latin America to build a thriving community with the goal of creating social impact through financial inclusion. They also organized the Latin American Bitcoin and Blockchain Conference.
The blockchain community hosts companies like BitFarms, founded by Emiliano Grodzky, one of the largest bitcoin farming operations in the Americas. It is the base for the development team of Xapo, a U.S.-headquartered company that was founded by Argentine Wences Casares that provides an online wallet and a vault. Diego Gutierrez Zaldivar himself is the CEO of RSK, the first open-source smart contract platform with a two-way peg to Bitcoin that rewards the Bitcoin miners via merge-mining. Others include a group that is part of the core development team of Ethereum, the founder of Democracy Earth, which is seeking to enable a borderless peer-to-peer democracy, and Zeppelin, a company that has audited token sales for over $600 million.
The vice president of the central bank, Lucas Llach, explained how the new administration is not only fighting hard to keep inflation low but also designing policies to stimulate competition, facilitate inclusion through finance and the digitization of the financial services sector. Established banks that have enjoyed high returns through traditional banking services and limited competition have seen the writing on the wall, and have begun to embrace the changing landscape.
For example, over the past years, Banco Galicia, a leading bank with one of the strongest brands in Argentina, has started deploying and improving its digital offerings, creating a culture of innovation, running hackathons and putting agile teams in place. It has recently embarked on a corporate-wide digital transformation initiative that is being championed by young executives eager to accelerate change and adaptation.
Energy is another major economic sector that is undergoing disruption worldwide through the adoption of renewable sources. Argentina is extraordinarily rich in energy resources. It has some of the most favorable conditions on the planet for wind power in Patagonia and for solar power the Northeast, as well as some of the largest lithium reserves. While majority of the energy investments are still being channeled towards the development of Vaca Muerta, one of the largest shale gas formations in the world, the transition towards renewables has begun to accelerate in the last two years.
Sebastian Kind, secretary of renewable energy, passionately presented the opportunity ahead and explained how the country aims to take the share of the electricity produced from renewable energy from about 2% last year to 20% in 2025. To enable this objective, an innovative biding program called RENOVAR was developed that essentially eliminates the country risk for investors through a multi-tier guarantee program backed by the World Bank. This has already helped Argentina attract foreign energy investments in excess of $4 billion.
“The fintech revolution is … spreading quickly through the startup ecosystem.”
Entrepreneurs and incumbents are also beginning to take advantage of the opportunity stemming from new technologies and business models. Startups like Sustentator are beginning to sell solutions for decentralized generation, building a social network with over three million followers to be able to accelerate their growth as the cost of solar panels, wind turbines and lithium batteries continues to plummet. NGOs like EcoMujeres are educating and mobilizing women towards a sustainable future, and energy trader Juan Bosch is now helping corporations to deploy their own renewable energy solutions.
Some entrepreneurs have even moved to a global stage. Semtive, which created highly efficient, small wind turbines, was recently selected as the most innovative company of Latin America by Fast Company. It was founded in Argentina and is now focused on pursuing the U.S. market from its headquarter in NASA Ames Research Center in Mountain View, CA. Voltu Motor, a startup born in a garage in the interior of Argentina that designed a high-performance electric motorcycle, is also launching its product in California and is being accelerated by Plug and Play in Silicon Valley.
Finally, YPF, the national oil company and the largest company in Argentina by revenue, while focused on fossil fuels, is beginning to embrace the trends towards renewables. Under the leadership of a new president, who has brought in new talent from multinationals in other industries to complement internal talent with distinct expertise and fresh perspectives, YPF is developing wind energy parks, repositioning its different brands towards a sustainable future, preparing for growth in electric cars, pushing digital transformation initiatives, and exploring ways to connect with and fund innovative startups.
Argentina is endowed with extraordinary fertile lands and mild weather, making it one of the world’s major producers of soybeans, wheat, meat and wine. The food sector is also beginning its transformation through deployment of mobile, cloud-based applications, drones and advanced biotechnology techniques. Agtech startups covering a range of applications have emerged in the last few years. S4, which was recently recognized by AgFunder as one of the most innovative agtech startups outside the U.S., is focused on providing satellite-based risk-management data analytics for agribusinesses. Tambero, a cattle management mobile application, has 160,000 clients in nearly every country of the world, and is enabling cows to communicate with farmers. Agreemarket is offering a global platform for smart commodities trading.
New accelerators with focus on agtech are beginning to focus on the market. Some are spurred by an Entrepreneurship Law passed by the government that creates incentives for the development of the venture capital industry based on the successes of Israel. The Yield Lab, based in St. Louis, is launching a local fund. Nest, originally an angel investor group made up of large farmers, is now launching a fund. Adeco Agro, a low profile but fast-growing diversified agribusiness corporation, is now exploring ways in which it can build an agtech-based innovation ecosystem. The Duhau family, one of the largest and most traditional groups in the sector, is also investing in and collaborating with startups.
The roots of the agtech ecosystem are deep. Seventeen years ago, a group of 23 forward-thinking agricultural producers noticed that scientists were being underpaid in Argentina and created Bioceres, an ag-biotech company focused on generating and commercializing locally developed intellectual property. Since then, the company has gone on to become a fully integrated provider of crop productivity solutions, including seeds, seed traits, seed treatments, biologicals, high-value adjuvants fertilizers and drought resistant crops. It is about to get publicly listed in the U.S.
“We found a new generation of leaders and entrepreneurs committed to building a better future, pursuing innovative solutions with a global mindset, trying to transform corporations to avoid obsolescence, and designing policies to spur innovation.”
The agtech ecosystem is also benefitting from advances in data analytics and satellite imagery. For example, Frontec, a subsidiary of state-owned INVAP, which builds advanced technologies such as satellites and experimental nuclear reactors, is providing geo-referenced data analytics for precision agriculture.
A startup, Satellogic, is building its own constellation of nano-satellites to enable live geo-information analytics across industries. The company has already built and deployed eight meter-resolution satellites capable of generating high-resolution hyperspectral images. Using agile methodologies and state-of-the-art electronics sourced globally, it is able of to develop satellites in months instead of years — and at small fraction of the cost of traditional satellites — putting the company at the forefront of the satellite revolution, together with companies like Planet.
Extractive institutions can deter countries from benefitting from technology revolutions (Why Nation’s Fail: The Origins of Power, Prosperity, and Poverty, Daron Acemoglu and James A. Robinson, 2013). The wounds of decades of populism are still fresh in Argentina. Many of the protectionist policies around trade are still prevalent. The culture of collaboration between businesses is also somewhat lacking.
However, we found a new generation of leaders and entrepreneurs committed to building a better future, pursuing innovative solutions with a global mindset, trying to transform corporations to avoid obsolescence, and designing policies to spur innovation. While these are early days in the process of creative destruction, if elephants could tango, this is the time for them to do so in Argentina.