20 insights about launching a company in Medellin, Colombia

20 insights about launching a company in Medellin, Colombia

HalloCasa conducted its second interview with David Feldsott, the Founder / CEO of PanTrek Inc. based in Medellin. PanTrek is a free online search engine for booking inter-city bus and ferry tickets in Latin America. The platform provides in-depth company profiles, user reviews, ratings, amenity listings, photos, and other qualitative information to help backpackers, tourists, and locals book the best route for them. The startup comprises a team of 5 employees and is currently building out its beta with the aspiration to launch in October, 2015.

HalloCasa: “Good afternoon, Mr Feldsott. Thank you for taking the time and to talk with HalloCasa. First of all, in order to introduce your startup properly, could you give a short description of how you came up with the idea of PanTrek?”

David Feldsott: “Thank you very much for having me! I am happy to give you an interview about opportunities in Colombia and insights about Medellin. Concerning PanTrek, I came up with the startup idea as I was planning a backpacking trip through Central and South America. Everyone told me to travel by bus since airlines are more expensive here because there are no low-cost carriers like Southwest, EasyJet, Tiger Airways, or RyanAir.

As I was looking for information online about how to travel by bus, including the best bus companies with the nicest amenities, prices of tickets, route information, schedules, etc. I couldn’t find anything useful. There was little info online and no comprehensive search engines, so I decided to build one.”

HalloCasa: “Ok, that means you encountered yourself with a problem and wanted to solve that problem yourself. A common start of a business. Less common is to start a business abroad. This leads to our next question: what was your motivation to live in Colombia and why did you choose especially Medellin?”

David Feldsott: “I should preface this by saying that since I am building a Latin American focused company, I felt the need to live in Latin America. And after exploring all of my options, including a short 6 month stint living in Cuenca, Ecuador, I decided Medellín was the best place for me to set-up my startup for multiple reasons, both personal and professional. In particular, there are both personal and professional reasons for Medellin:

Concerning personal reasons, the first one is that Medellin´s climate is simply incredible. Medellín is known as the “city of eternal spring” and the weather here is incredible. The temperature is usually between 75-80 (24-27 Celsius) degrees everyday. The city is also surrounded by stunning mountains and quaint towns and there are an abundant amount of outdoor activities to pursue. The local government even sponsors free guided hikes in the surrounding area.

As a second personal point I regard as essential that Medellin is a city with good infrastructure. The city is large enough to keep most people entertained.

The city of Medellín is filled with ~2.5 million people and almost 4 million in total when you include the metropolitan areas of Bello, Envigado, Itagui, and Sabaneta.

The city has an extensive public transportation network including a well-run metro system, dedicated lanes for the MetroPlus bus system, the MetroCable, and a lot of ordinary “cooperative” buses too.

The last personal reason was the variety of offerings in recreational activities. Medellín is often referred to as the “Cultural Center of Colombia”. There are almost 40 museums (e.g. Museum of Modern Art and an interactive museum called Parque Explora”) in the city, along with multiple theatres and even a planetarium and the largest freshwater aquarium in South America. The nightlife in Medellín is legendary and there is also a gigantic and free sports complex in the Estadio neighborhood (where I live) for anyone to play almost every sport imaginable.

As for professional reasons, Medellin´s entrepreneurial culture was definitely striking. People from Medellín are known as “Paisas” and the Paisa culture is very entrepreneurial. Historically, there was not much government support, so Paisas had to be resourceful and earn a living on their own. I have met many local people who fully embrace entrepreneurship and are very interested in taking on side-projects and lending a hand in new ventures. Much of PanTrek’s design work has been accomplished through two local designers helping us out in their spare time.

In addition, Medellin has relatively low cost of living and hence lower salaries. Software engineers in the United States are extremely expensive, with many commanding salaries of $120,000+ a year. In Medellín, you can find top-quality developers for 1/3 of that cost. Rent in Medellín is very inexpensive, which is great for bootstrappers. I used to rent a room in a beautifully renovated, high-end apartment with gorgeous city views in the most expensive neighborhood and my rent was only ~$500 a month. Now, I rent a room in the Estadio neighborhood to save more money and I only pay ~$200 a month. Expats can live very comfortably in Medellín. Also, due to Colombia’s heavy reliance on the oil & gas sector, the Colombian Peso has been one of the worst-performing currencies worldwide this year (over 45% depreciation since I arrived in Colombia only 7 months ago), which means the US Dollar now goes a lot further!

As a further point I would like to mention the desire to succeed. No universities in Colombia offer “computer science” degrees, but rather a degree in “systems engineering.” Colombians learn high-level concepts and algorithms with little practical coding experience. While some people might look down upon this, I think it’s a beautiful thing because it means that most software developers are self-taught. They have the drive to learn new concepts and programming languages. The desire to strive for a better life is incredibly helpful to succeed in building a technology startup.

The fourth professional reason was that people in Medellin have a growing interest in technology. The logistical shipping problems in Colombia, combined with high taxes on import like electronics, has stifled much of the potential for e-commerce in Colombia. Less than 2% of purchases in Colombia are made online, but the desire to do more with technology is readily apparent. Social media penetration is very high in Colombia, smartphones are ubiquitous, and even the Tigo, one of the nation’s wireless carriers, is offering free internet access to many websites, including Facebook. The interest in technology and the internet is much higher here in Colombia than it is in many other Latin American countries like Ecuador, Bolivia, and Paraguay.

As the penultimate point, I would like to mention the stable and growing economy in Colombia generally. Argentina, Brazil, and Venezuela are likely all in recessions right now. Many other South American countries are struggling to find economic growth, but Colombia keeps growing. The Financial Times reported that Colombia’s GDP grew by 4.6% in 2014 and inflation is expected to be relatively stable around 3-4% according to Colombia’s Central Bank. Of further note, the violence and political instability that existed during the drug-fueled Pablo Escobar days has largely subsided. Personally, I feel just as safe here in Medellín as I did living in NYC.

The final reason for Colombia had a lot to do with my business idea. Colombia is perfect for intercity bus travel. Colombia’s geography (kind of a square shape) allows for a plethora of bus routes and I want to prove that a search engine for inter-city buses can thrive even in a country with a low-cost airline (Viva Colombia). Colombia’s inter-city buses are also of high-quality and combined with its rapidly expanding tourism sector, the country feels like the perfect market to build my travel startup”

HalloCasa: “That sounds like plenty of reasons to move to Medellin. With respect to the future, which trends do you see in Medellín and also in Colombia as a whole?”

David Feldsott: “The technology scene in Medellín is vastly over-hyped on the Internet. While I did not expect to find a technology scene to rival that of my previous homes of Boston, New York, or San Francisco, I still expected to quickly find the go-to people and groups of tech entrepreneurs, since it is a smaller community. Boy was I wrong! Many of the previous articles written about the large technology scene in Medellín were from individuals who had a vested interest in attracting more foreigners to the city, in part to profit off of them. That might sound harsh, but it is true. However, since arriving in Medellín almost 7 months ago, I do believe the tech community is finally starting to reach a point of critical mass. Not a day goes by that I don’t meet a foreigner who has just arrived in Medellín looking for talented programmers to help build his/her tech startup idea. There has been a recent explosion in technology-focused groups on Meetup.com. Two angel investor networks (AIM Network and Langon Capital) have launched recently to

fill the need for early-stage financing, and 6 co-working spaces have opened (or are opening) their doors recently too. A Founder Institute program was created not too long along as well as Colombia’s first Ruby on Rails bootcamp named “Make It Real.” They even conducted their first hack-a-thon 3 months ago. My friend (Miah King) created the first factory in Medellin for robotics / hardware, in the neighborhood of Envigado. It is called Gora and affiliated with a co-working space called 20Mission. There are pockets of innovation in the tech community in Medellín, but it was very hard for me to find them, especially for a foreigner. That is why I am building 2 communities myself, a Python/Django meetup group to help find talented programmers for my startup as well as a “support” group of Medellín entrepreneurs who are focused on building scalable products. With this “support” group, I hope to unite the entrepreneurial community, not just tech but also other scalable products, including medical devices, food/beverage product lines, etc. By creating a more cohesive and informed community, Medellín might one day become the Silicon Valley of Latin America. But right now, there is a lot more work to be done to get there.”

HalloCasa: “Ok, that is definitely different from what we heard, too. Concerning, launching a new company as a foreigner in Colombia, people might be curious about obstacles when launching a company. What do you see as the biggest challenges when it comes to starting a business contrary to the US.?

David Feldsott: “Firstly, there are no advantages to creating a business in Colombia (from a legal or tax perspective) compared to the United States. That is why we are a US company with an office in Medellín, but we have not incorporated in Colombia. We are trying very hard not to incorporate a company here, as long as our business needs permit it. I have been told that most large tech companies in Bogota do not even have subsidiaries in Colombia either.

Overall, the problems with setting up a business in Medellín have to do with government bureaucracy / inefficiency, government taxes / fees, slower transaction lifecycles & assistance, banking / payment processing shortfalls, reluctance to conduct business over email / internet, shipping & customs problems, and introductions are almost mandatory.

The first problem is the government bureaucracy and inefficiency. Everyone here hates the idea of doing anything that involves interacting with government entities because the government over-complicates everything. For example, the government recently changed the process for obtaining a “business-owner visa”.

In order to get the visa, you must have a business bank account, but in order to get a business bank account, you must have a cedula (government identification card), which can not be obtained without first having a visa. Notice the big problem here?! The regulations make no sense! And yes, corruption still exists here, whether people like to admit it or not. They just prefer instead to call it “doing favors.”

The second issue I want to mention is taxes and fees. As a foreigner, incorporating a company in Colombia and obtaining the “business owner visa” is actually more expensive than incorporating a company in the United States. Most people need to hire a lawyer to handle the process, which costs around 4.2 million Colombian Pesos (~$1,700). Then every year (after the 1st year), you owe a minimum tax of 3 million Colombian Pesos in taxes, even if you do not have any income. You must also file monthly financials with the Colombian government that were completed by a registered accountant. The expenses really add up over time.

The employee taxes here are also astronomical, which is why even Colombian companies prefer to classify their workers as “independent contractors” whenever possible. Employee taxes add 51.87% to the cost of an employee salary. If you have a software engineer with a monthly base salary of 4 million Colombian Pesos, the cost to the employer is actually ~6.1 million Colombian Pesos. Colombian corporations have the 6th highest tax rate in the world according to the World Bank!

Furthermore, economic slowness complicates many processes. Overall, business moves slower here in Colombia than in the United States or Europe, and this is especially true in Medellín (compared to other cities like Bogota). If you are having problems with your Internet in the United States, you can probably get a technician to come within a 2-3 days to fix the issue. In Medellín, you are lucky if you get this accomplished in 2 weeks. Investors in Colombia are also very risk-averse, so raising a seed / angel round takes a lot longer in Colombia than in the United States. Signing and implementing a business partnership can be painfully slow too. While I don’t have concrete data here, I would estimate that creating B2B partnerships here in Medellín is 50% slower than in the United States.

Linked to this is the point that has to do with deficiencies in banks and payment processing. Oh banks…where to even begin here! An article in Colombia Reports by venture capitalist Michael Puscar perfectly sums things up in a nutshell, “Being able to send text messages while waiting in line at the bank would be a great start.” Lines at the bank are astronomically long, online payments are quite difficult, lending fees are substantial, there is even a 0.4% tax on withdrawals from corporate bank accounts, and bank transfers can require a lot of paperwork / bureaucracy and many times people’s assets are frozen for “no apparent reason.” If you wish to accept payments online from customers in Latin America, you better be ready for a lot of headaches as the banking system is fragmented from country to country and many banks / LATAM payment processors do not work with international credit cards. The largest payment processor (PayU) only works with banks in 7 out of the 18 major LATAM countries. While payment processing fees in the US can be as low as 2.9% on transactions, it can be over 5% in Colombia.

In addition, the reluctance of companies to communicate via e-mail imposes a big challenge. While this area has been improving over time, many Colombians are still hesitant to conduct business via email or over the Internet. I’m not saying nobody does it, but it’s more of a rarity / exception when it happens. For example, I emailed a co-working space in Medellín to ask about their prices, hours, and when they would open their doors so I could work there. I never heard back from them; which is pretty common. In the US, that just does not happen since that is a great lead on a potential customer. Also, e-commerce only represents ~2.2% of sales in Colombia, so don’t expect your new product to fly off the shelves if you start selling it to Colombian customers.

The penultimate point, I would like to list might be familiar to entrepreneurs which are active in the e-commerce business: delivery and customs problems. A major reason Internet sales are low overall is because of the lack of integrated shipping / logistics solutions in Colombia. If you purchase a pair of shoes over the Internet, it is very difficult to track your order throughout the purchase cycle. There are rarely tracking numbers, so you are not sure if your product has left the store / factory, when the courier receives the package, when the package is out for delivery, and when it has arrived on your doorstep. Also, the taxes for importing luxury products, such as electronics, are quite substantial and many people report significant delays in delivery or the outright seizure of their goods because of incorrect paperwork or failure to pay customs fees.

Lastly, the fact that personal introductions are almost mandatory complicates to a great extent the market entry for unknown startups. Michael Puscar’s article identifies the root of this problem: there is a deep-seeded lack of trust amongst Colombians. In general, Colombians do not trust other Colombians that they do not personally know. So, in order to do business with Colombians, most of the time, you need to be introduced or you are unlikely to cultivate a relationship.

This can actually be a big advantage to being a foreigner in Colombia. Surprisingly, Colombians are known to trust foreigners more than their fellow Colombians. Many apartment listings by Colombians are advertised as “solo para extranjeros” (for foreigners only) and most businesses have been more willing to set-up meetings with me than some of my Colombian colleagues.”

HalloCasa: “Very interesting. Yes, it seems that there are far less challenges in Bogotá. For example, ordering furniture on e-commerce sites in Bogotá arrives within one working day, including tracking number. No obstacles there at all. Another example is to apply for your working visa. It takes a couple of hours and is definitely a faster process than in several Western countries and you can do most of it online. Getting a new internet connection takes some working days and bank accounts have very easy-to-use online banking options and no signs of “solo para extranjeros” ads. Obviously, it always depends on the particular case. Now, touching the topic of real estate a little bit. How was it to rent your office? How was the process and what are the expenses you face?”

David Feldsott: “In the beginning, I worked out of a co-working space in Medellín. However, once I built out my team, we decided that we were not impressed with any of the co-working spaces and the cost for space for 3 people was more than we would have to pay for office rent. So, we decided to look into acquiring some office space. The problem with renting real estate in Colombia is the requirement of having a fiador (MedellinLiving has a good fiador explanation). So, it is easiest to negotiate directly with the landlord whenever possible to avoid the fiador requirement. I was able to find affordable office space directly with the property owner, above a café, in the beautiful Segundo Parque de Laureles area. We are paying 700,000 COP a month (~$250 USD) for an office that fits our team and includes all utilities (electricity, water, internet) and has a shared kitchen with other offices. I pay 1 month in advance directly to the landlord to secure against any damages. The process has been smooth and I recommend working directly with the owner of an office space whenever possible. There is also a decent website to help find office space: EspacioUrbano. If you wish to hire a real estate company, just know that most Colombian real estate groups do not have the same customer service standards that foreigners would be used to. There are also real estate agencies run by foreigners, with comparable customer service standards to the United States, but you will pay a lot more for that level of service.”

HalloCasa: You say that it is necessary to work with a Fiador, if you don´t do the deal directly with the owner. Is that always necessary when you work with a broker? Or does that only apply to foreigners? Might a fiador also have some advantages, since it makes the process easier and it allows you to rent real estate, since the owner has a trustee and you are creditworthy?”

David Feldsott: “The fiador (which is a property owner) is basically someone who acts as a guarantor (insurance) of the property on behalf of a tenant. If no property owner will act as a fiador on your behalf, then you can hire an insurance company or sometimes pay the entire rental contract in advance, which sometimes happens when dealing directly with a property owner. If the tenant does not pay rent, the fiador is responsible for the payment. The Fiador requirement (which is also common in Brazil) is never a good thing (for the renter) and does not make the process easier.

It has nothing to do with creditworthiness since the renter could have amazing credit or a lot of assets as collateral, but if they do not own property within Medellin proper (the suburbs of Medellin do not count, like Envigado or Sabaneta) then it does not count towards their benefit. The fiador just adds an extra layer of bureaucracy and cost to the process. It does not only apply to foreigners. My local Colombian friend had to get his friend’s parents to act as a fiador for him because he could not rent a place without having fiadors. From the perspective of a renter, it is a terrible law that needs to be gotten rid of. But, from the perspective of the landlord, they like the fiador requirement because it adds an extra layer of security in case the renter leaves town and does not pay their bills.”

HalloCasa: “Ok, that might be interesting information for people who are planning to invest in Colombia and would like to rent out their apartments or houses. This gives them an additional layer of security. If you could wave a magic hand, what would be the one thing you would change about Colombia?”

David Feldsott: “Wow! That is a tough one. The simple answer would be for business to move at a faster pace, like in the United States. Our partnership deals have been creeping along and it is very irritating. But, my biggest complaint here in Colombia is that when there is a conflict, most Colombians ignore the problem instead of attempting to resolve it. This is a cultural thing that occurs in both business and in people’s personal lives, such as in dating. For example, I had a date scheduled with a Colombian woman. Rather than the woman telling me that she did not want to go out or that she just did not feel like it that day, she just ignored my repeated attempts to confirm our date. Two days later, she finally sent me a text message, saying “Que pena!” She did not apologize or give me a reason for why she ignored me for 2 days. So, rather than be direct and potentially “confrontational,” she ignored the situation and hoped it would resolve itself or go away. This type of behavior happens all the time, including with the Director of Partnerships at one of the largest bus companies in Colombia. It is incredibly frustrating!

HalloCasa: “Mr Feldsott, we know that your time is limited. Therefore, one last question: Overall, how do you feel about living in Medellin and do you plan to stay in Colombia long-term?”

David Feldsott: “Overall, I love it here. Medellin is a beautiful city. The people are friendly and I feel safe living here. The climate is great as is the transportation. There are plenty of fun things to do / see and the quality of life is excellent! I am building my company’s headquarters here and I hope to live and work here long-term. It has become my 2nd home and right now, I am truly happy. In my opinion, the positive characteristics of Medellin and Colombia outweigh the downfalls and hopefully those downfalls continue to decrease over time and make life here even better than it already is.”

HalloCasa: “Mr Feldsott, thank you very much for all your honest and frank opinion. We really appreciate that! Would it be possible for interested readers to contact you if they have some follow-up questions?”

David Feldsott: “Yes, of course, readers may contact me via my LinkedIn Profile or my

Twitter Profile or via our corporate links: PanTrek.com, Facebook Page

Thank you very much!”

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