When I returned to Puerto Rico after years working in Silicon Valley, my move was met by many with confusion and stunned silence. Looking back, I can understand why. A decade-long economic crisis and lack of job opportunities has caused hundreds of thousands to leave their island home.
Like me, many of them have yearned to return ever since they left. But while the situation is still dire compared to the mainland United States, the growing start-up ecosystem offers a beacon of hope that may change people’s minds about the viability of doing business in Puerto Rico.
Over the past few decades, a big part of the island’s economy has depended on money generated by foreign companies. This was a sub-optimal scenario, due to the fact that, although they created jobs, much of the money these corporations made ended up leaving Puerto Rico. Moreover, recent favourable tax cuts have expired and the jobs themselves have been packing up.
Hence in seeking a more sustainable solution, the government and many in the private sector have been devoting more resources to encouraging the creation of local companies that export services from Puerto Rico. This has facilitated initiatives such as Parallel 18, a local start-up accelerator that attracts companies from all over the world, as well as tax incentives that encourage entrepreneurs to export their products and services.
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Even with such programmes, the odds of Puerto Rico developing a robust start-up ecosystem seem low from the outside. It doesn’t have a developed venture capital (VC) industry, it has suffered an aggressive brain drain for more than a decade, and its local market is very small relative to the US. Then, just as the start-up scene was beginning to gain traction, Hurricane Maria hit.
Despite the challenges, Puerto Rico can look to other countries that have faced hardship for guidance on how to take entrepreneurship to the next level. It must move from developing the current annual yield of 40-80 start-ups to hundreds. Chile, Israel and Colombia have all faced similar situations, yet have successfully enacted policies that helped foster entrepreneurship.
So, what issues need solving in order to boost Puerto Rico’s start-up ecosystem?
Firstly, Puerto Rico lacks access to capital. While this is expected to grow as deal flow increases, it can look to Chile for ideas. Companies graduating from the country's accelerator Start-Up Chile faced similar struggles with capital, so CORFO, Chile’s Economic Development Agency, now matches every $1 invested in a start-up with $2 or $3, in the form of low-interest loans to VC firms. The companies then have to pay back the loan to the government if the start-up has a successful exit. This has helped Chile's VC industry grow to more than $415 million annually.
Secondly, Puerto Rico can boost investment by leveraging its robust diaspora. In the last decade, hundreds of thousands have left in search of better opportunities in the mainland US. There are more Puerto Ricans living there than the roughly 3.4 million living on the island. This was already a huge problem before the hurricane, but it’s anticipated to continue worsening.
The island can also look to Israel for guidance on how to tackle this issue. The country has turned its brain drain into "brain circulation" by offering incentives for diaspora investment and maintaining ties with entrepreneurs who left. In their book Startup Nation, Dan Senor and Saul Singer point out that the "brain circulation model of Israelis going abroad and returning to Israel (temporarily or permanently) is one important part of the innovation ecosystem linking Israel and the diaspora".
As Puerto Rico’s ecosystem grows, it should aim for the diaspora to stop seeing the island as a place that draws sympathy and philanthropy, and begin seeing it as somewhere to do business.
Thirdly, Puerto Rico needs a developed workforce. With unemployment hovering over 9% (higher when we look at many places outside the metropolitan area), there is a lot more it can do to prepare its workforce for the highly skilled jobs start-ups need. It can follow Colombia’s approach, using Workforce Social Impact Bonds. While trying to promote an entrepreneurial ecosystem through initiatives such as Ruta N in Medellín, the Colombian government realized it was essential to equip the workforce with the skills that new businesses would demand. Social Impact Bonds provide the money necessary for the government to pay for training. It only pays back investors if certain metrics and cost savings are achieved. This would provide a low-risk alternative for a cash-strapped Puerto Rican government that needs to train its workers.
While there is a long way for Puerto Rico’s small business sector to go, early signs show momentum. Local start-ups are gaining international recognition. Global organizations have opened offices on the island, signalling more growth to come. More than 500 start-ups from around the world applied to be a part of Parallel 18’s fifth generation, and dozens of new companies have registered since the hurricane.
If Puerto Rico plays its cards right, when diaspora Boricuas tell their friends they’re returning to the island, no longer will they be met with confusion and stunned silence. Instead, they could hear: "I wish I were too.”