US island territory Puerto Rico sits just over a thousand miles from the mainland. While separated physically, it has also become marooned economically. The island has lagged behind the US in recovering from the economic crisis. It is now $70 billion in debt and in the throes of its very own crisis.
The Obama administration had to step in this summer with the passing of the Puerto Rico Oversight, Management, and Economic Stability Act, which effectively handed over the fiscal reins of Puerto Rico to a newly appointed oversight board. This new board will likely be vicious in its bid to balance the books for Puerto Rico. It will have to consider crushing cuts to health, education, and several other public services.
In August, President Obama appointed the seven members of the oversight board and most alarmingly for critics of austerity, this included Republican Andrew Biggs, a proponent of privatising social security.
On the ground, businesses are hurting. Manufacturing and real estate have for a long time been the backbone of the local economy. But Parallel 18, a start-up accelerator based in San Juan, believes that start-ups may hold the key to Puerto Rico’s reinvigoration. It has been promoting the island as an ideal location for young entrepreneurs that want to foster and grow their nascent businesses, citing its geographical location and relatively low cost of living. It sounds like a noble gesture but will it work?
“Our main goal is to capture some of the value that the start-ups create,” says Sebastian Vidal, executive director, who came to Puerto Rico after successfully running Start-Up Chile.
“[The government] really wanted to do something and they really wanted to take the risk of investing in start-ups and that’s something I didn’t see in other initiatives in other countries,” he says. The government was keen to put money into start-ups in the face of economic uncertainty. As it stands, Parallel 18 receives government funding to operate.
Puerto Rico wanted to create its own Start-Up Chile but directly replicating a system wouldn’t work either so it has needed to find its own identity.
There are four main pillars for the programme which it believes makes the island attractive to start-ups, according to Vidal. Its location between the US and Latin America makes it an ideal place to plot business opportunities in both regions. It has the Latin American culture but US infrastructure and is protected by US law. The cost of living and hiring is lower than most other start-up hubs and finally, the tax incentives are more accommodating, he says.
Parallel 18 provides $40,000 in equity-free funding to participating start-ups along with free office space and mentorship. It has already finished its first generation of more than 30 start-ups coming through its programme; 30% were Puerto Rican based or founded and the rest came internationally and all launched in the last three years.
A select few of the start-ups in the programme have decided to stay in Puerto Rico after the programme and maintain their operations there but expanding is the key. Vidal says he hopes some start-ups stay and keep some tasks within Puerto Rico, whether it’s software development or customer service, while the HQ is elsewhere.
“There is a huge brain drain in Puerto Rico. Of the engineers that are really good, typically most of them leave the island. That’s a huge problem. But we think in the long term and that’s where we’re aiming for, we can decrease that number significantly.”
According to Vidal, Parallel 18’s first generation of start-ups hired 75 locals either as employees or interns. “That’s huge. All of those 75 young professionals were about to leave the island but they don’t want to leave the island.”
The government’s helping hand
Spotery, an Airbnb-style service for venues and meeting rooms, is a start-up based in Puerto Rico that’s trying to make the best of the situation. It’s launched its beta in one location on the island and is already looking to San Francisco for future investment. Until now it’s been bootstrapped.
Finding funding locally will remain a challenge as there is little experience in tech start-up investing. Puerto Rico has traditionally seen a lot of real estate investment. Ricardo Davila, chief partnership officer of Spotery, believes the government has made the right move to introduce tax incentives in the face of the economic crisis to entice investors.
“[Start-ups] get super good rates on export services so they can actually settle in Puerto Rico and through the law that provides these incentives they can pretty much export everything that they do at a 4% tax rate,” explains Davila.
“There’s more start-ups growing out the crisis, there are a lot of start-ups growing and seeing Puerto Rico as a hub for exporting services.”
Davila says that despite Spotery’s designs on making a splash in the US, it has no plans to leave the island.
“The government and the private sector know that for Puerto Rico to be a spot in the global economy it will be through the start-up ecosystem. They’re yet to see a unicorn in Puerto Rico and I think we are on our way to that. We think we can do it but I honestly believe that there are a lot of companies that can do it from Puerto Rico.”
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