Puerto Rico starts up

Puerto Rico starts up

Locals are transforming the island’s start-up culture, one entrepreneur at a time.

Part of
Issue 8 Feb 2019

Internation­alization

In the fall of 2014, Sebastian Vidal, then the executive director of Start-Up Chile, flew to Puerto Rico to advise the commonwealth’s Department of Economic Development and Commerce on its innovation strategy. Ever since the Santiago-based startup incubator began making headlines for its positive impact on the Chilean economy, Vidal had received emails from government officials and diplomats all over the world interested in replicating the unique government-sponsored accelerator model that he had helped run since 2011.It was the first time a government created a startup visa,” Vidal explained. It also offered a new perspective: that a country’s culture could be changed through entrepreneurship.In the case of Chile, there were a lot of entrepreneurs, but they were all thinking very locally because of the geographic scenario.” Being so far south, he said, Chile’s economy felt much like that of an island.This program was a reason to think beyond the natural borders.” While most governments that Vidal met with liked the idea of Start-Up Chile, very few were willing to commit the resources to replicate the program’s success. From his first conversation in Puerto Rico, it became clear that the commonwealth’s Department of Economic Development and Commerce was different.

Vidal saw many similarities between Chile and the Caribbean island: in their geographic isolation, in their economies’ bureaucratic regulatory environments, and in their lack of venture capital. But what struck him most were the opportunities he saw in Puerto Rico’s economy.

If you are from South America and you come to Puerto Rico, you see things a bit different,” Vidal explained. It’s safer than South America, the time zone is an advantageous one, and the workforce speaks both Spanish and English, which allows for the development of sales and customer support industries. He appreciated the pairing ofU.S. infrastructure, but a Latino culture.” He also saw opportunity in the massive, 5 million-strong Puerto Rican population living on the mainland. (Only 3.5 million people currently live on the island.) That communityhas been very beneficial to the growth of the ecosystem,” he said.They are very committed to giving back.

Vidal wasn’t the only person who saw opportunity in Puerto Rico. That same year, Lucy Crespo, the former general manager of Hewlett-Packard Puerto Rico, came out of retirement to help her home capitalize on the same competitive advantages Vidal saw. In her new role as CEO of the Puerto Rico Science, Technology & Research Trustan organization created by the Department of Economic Development and Commerce to foster innovationCrespo came up with a plan to build up Puerto Rico’s struggling economy. She wanted to turn Puerto Rico into a startup mecca rivaling that of Estonia or Israel, a place where entrepreneurs could find venture funding, mentors, and a community of like-minded peers.

After years of rising poverty and unemployment rates, Puerto Rico desperately needed to spur growth. Centuries of colonial rule had left its natural resources decimated and its government saddled with debt. But recovering from 400 years of exploitation and reversing these trends would require an unprecedented shift in the island’s economy. By 2015, Puerto Rico was suffering from one of the worst debt crises in the world: Its debt per capita had ballooned to 10 times that of any U.S. state. To make matters worse, Puerto Rico’s out-migrationnearly 15 percent of the current population has left in the last decaderivaled that of Ireland in the 1840s, at the height of the Great Famine. Combined, these factors created an economic death spiral. With young peoplewhose taxed incomes traditionally help pay off public debtleaving the island in droves, the outlook was grim.

Crespo wanted to make Puerto Rico the best place in the world to start a company. Building an entrepreneurship ecosystem from scratch would be difficult no matter the circumstances. To do so in a shrinking, debt-ridden economy was almost unfathomable. But Crespo believed there was no alternative and began working tirelessly to see her vision through.

When I accepted the job,” Crespo said,the first thing they told me was, ‘You need to get Sebastian.’” Vidal’s reputation preceded him, and when she got him to the island in 2015, she shared her vision for Puerto Rico. Together they hatched a plan to replicate the Start-Up Chile model. A few months later Vidal quit his job in Santiago to join Crespo in San Juan and become the executive director of a newly formed accelerator, Parallel18.

Crespo then recruited young Nuyoricans like Denisse Rodríguez Colón to leave cushy jobs in New York and join the innovative government-funded organization. By 2017, Parallel18 had already incubated 60 companies. Collectively, they had raised $15 million and generated nearly as much in revenue. Every month the team inched closer to their goal of building a new Puerto Rico.

But on September 20, 2017, that progress came to a screeching halt.

At 3 a.m., Sheilla Torres-Nieves woke up to the cries of her newborn. Only a few years before, Torres-Nieves had returned to Puerto Rico from the mainland to build a Parallel18-funded solar technology company, Sunne, in Mayagüez. After feeding the baby and putting her back to sleep, she checked her phone and noticed the signal was dead. Hurricane Maria had made landfall. After a few hours of sleep, she and her husband, Jose Lebrón, turned on the radio to listen to a weather broadcast. At 7 a.m., the station cut out. It was the last form of communication the couple would hear from the outside world for weeks.

Twelve hours later, after the hurricane passed, Torres-Nieves walked outside to an unrecognizable neighborhood.It was like a bomb went off,” she said.The trees had no leaves. They actually looked burned.

We started working on everything we could do offline. Marketing stuff, back-burner stuff, stuff that was always falling off the list,” Torres-Nieves said.

But on that first day, Torres-Nieves asked Lebrón when he thought the power would be back.

Just wait until the weekend,” he replied. Without a cellular connection, internet, or TV it was impossible for him to know how far off his prediction was.

In the days that followed, lines formed at gas stations and grocery store shelves were picked clean. People walked around with their phones in the air looking for a cell signal. Police escorted trucks with gasoline and water. The day after Maria struck, the government announced on the island’s only functioning radio station that citizens should be prepared to survive without governmentincluding police and firefighting servicesfor at least two days.

On the other side of the island, in San Juan, the port where Torres-Nieves and Lebrón hoped to receive hardware components. was so damaged that even humanitarian aid ships weren’t able to use it. That closure, along with the destruction of other essential infrastructure, resulted in businesses like Sunne being unable to serve the few customers who wished to buy in the weeks following Maria. And this cash-flow crisis created a devastating economic domino effect.

How many startups or small businesses do you know that can survive for a week without revenue, let alone a month?” Denisse Rodríguez Colón asked.

Rodríguez Colón, who left her job at Goldman Sachs in New York to direct Colmena66an organization funded by the Puerto Rico Science, Technology & Research Trustreceived dozens of messages after the hurricane from people in the diaspora community asking how they could help. That’s when she had the idea for Shop+Hire PR, a marketplace to buy Puerto Rican products or hire a freelancer. On November 20, four days before Black Friday, she and her team launched the site.

Since all eyes were on Puerto Rico, the media picked this up and it went viral,” she said. ABC News, NowThis, and dozens of other media outlets covered the story. When Rodriguez appeared on The View, one of the e-commerce websites she had promoted, Brands of Puerto Rico, crashed due to the spike in traffic.

In every crisis there is an opportunity,” Crespo said. According to her, the island needs to change its culture of entrepreneurship. There are tens of thousands of small businesses on the island, but almost no companies that want to scale globally. Creating an ecosystem where growing companies can thrive, she argued, is an essential part of solving Puerto Rico’s economic crisis.

When Crespo graduated from the University of Puerto Rico at Mayagüez in 1985, no one was talking about entrepreneurship as a possible career path. Hewlett-Packard was just starting operations on the island, thanks in large part to Section 936, a generous tax break designed to draw companies to Puerto Rico. She joined the company and rose through the ranks until she was GM of Latin American operations for UNIX.It was a great career, but entrepreneurship was never on my horizon.

As the Section 936 tax breaks were phased out between 1996 and 2006, the Puerto Rican economy slowed. Manufacturers and large pharmaceutical companies started leaving and took their high-paying jobs with them. Between 1996 and 2014, employment in the manufacturing sector fell by almost 50 percent, according to U.S. Federal Reserve data. And nearly 50 percent of the island’s GDP came from manufacturing. This had predictably disastrous consequences. By 2006two years before the Great RecessionPuerto Rico’s economy began shrinking. With less tax revenue, the government began issuing municipal bonds to make up the deficit. Ten years and one global economic crisis later, public debt had nearly doubled.

Crespo believes Puerto Rican entrepreneurs and business leaders missed an opportunity to capitalize on Section 936 and in turn solve many of the island’s economic problems.If you look at what other countries like Singapore and Malaysia did, you see they started in capital-intensive industries and then moved to more technical ones.” She argues that Puerto Rican entrepreneurs should have created ancillary businesses that served the large multinationals. Nearly everyone I spoke to for this story points to PACIV, a process automation control company, as the only example of such a business.

After working for Eli Lillya pharmaceutical company based in Indiana with operations in Puerto RicoJorge Rodriguez started PACIV to streamline a complex compliance process unique to manufacturing prescription drugs. He had been interested in business since the age of 10, when he started selling newspapers and fruit at traffic lights. Now, launching a company with global ambitions set him apart.

The culture of the 1970s going forward was basically to get a degree and work for one of these large companies,” he explained.At that time, the word ‘entrepreneurship’ was never heard. All of my friends said, ‘What are you thinking?’

But Rodriguez saw an opportunity to build a business as large as the multinationals he and his friends were working for. He figured that if he did good work for their Puerto Rican operation, he could win more contracts and expand globallyand the bet paid off. In 1997, the year he started PACIV, the company earned $112,033 in revenue. Three years later, it broke a million. By 2005, the company pulled in more than $10 million per year and had operations in Ireland, the UK, and Europe.

Legislators in the U.S. Congress hoped to see industrialization like this when they passed Section 936. But Rodriguez was the only Puerto Rican entrepreneur to start a business at the scale required to grow the island’s economy significantly.

Doing business around the world was unheard of,” he said, citing Puerto Rico’s history as a primarily agricultural producer for global powers.The self-esteem of the whole society was really low in terms of creating value for the world.

While Puerto Rico is technically a commonwealth, it’s not unusual to hear it referred toeven todayas a colony. The island, originally home to the Taíno people, has the ignominious honor of being visited (and claimed) by Christopher Columbus on his second voyage to the Americas. Spain ruled for the next four centuries, until the United States invaded in 1898 during a war ostensibly being fought to support a Cuban revolt against Spain. Led by racist politicians and military leaders in the era of Manifest Destiny, the U.S. invasion of Puerto Rico was a transparent land grab. On July 21, 1898, the U.S. government stated its intentions in a press release:Once taken [Puerto Rico] will never be released. It will pass forever into the hands of the United States. … Our flag, once run up there, will float over the island permanently.

In 1899, the U.S. government outlawed the Puerto Rican peso and required that all citizens convert their money to U.S. dollars. In doing so, they set the value of the peso to 60 percent of the dollardestroying the value of most Puerto Ricans’ savings. Two years later, they introduced the Hollander Bill, a colonial land tax that forced many farmers on the island to mortgage their land with mainland banks. In his 2016 history of U.S. intervention on the island, War Against All Puerto Ricans: Revolution and Terror in America’s Colony, Nelson Antonio Denis writes:

With no laws restricting usury, interest rates were so high that within a decade, the farmers defaulted on their loans, and the banks foreclosed. These banks then turned a diversified island harvestcoffee, tobacco, sugar, pineapple, and other fruitsinto a one-crop cash cow. That crop was sugar.

The island’s first governor, Charles Herbert Allen, a U.S. politician with close ties to mainland bankers, oversaw the entire operation. When his term as governor ended in 1901, Allen left Puerto Rico to return to Wall Street, where he built and eventually became the president of the largest sugar syndicate in the world, the American Sugar Refining Company: today’s Domino Sugar. By 1930, 45 percent of all arable land in Puerto Rico had been converted into sugar plantations. By 1934, 80 percent of those plantations were owned by U.S. banks. In just a few years, American profiteers had effectively stolen the island’s most valuable resource and forced most of its population into low-wage labor.

In 2009, a year in which 60,000 Puerto Ricans left the island for the mainland, Sofia Stolberg booked a plane ticket going in the opposite direction. She had spent the prior seven years studying at Columbia University and London’s School of Economics and working for McKinsey & Company as a consultant. During a project in Equatorial Guinea, she contracted a rare bacterial infection; doctors advised her to see one of the world’s leading infectious disease experts in Puerto Rico. It was a strange way to return to the island where she grew up, but she decided to stay with her family until she recovered.

Shortly after returning to Puerto Rico, Stolberg was introduced to Jorge Rodriguez, who told her about a new project he was about to start with angel investor Daniel Isenberg, who also taught entrepreneurship and policy at Harvard University and Babson College. Stolberg and Rodriguez came up with a plan to put Isenberg’s research on entrepreneurial ecosystem development into practice. The following year Rodriguez started the Puerto Rico Entrepreneurship Ecosystem Project (PREES), with Stolberg signing on to lead the initiative as executive director.

I wanted those tall buildings that you see flying into San Juan to be local companies,” he said, remembering their initial idea.

Over the next year Stolberg organized events, connected local companies to mainland funding, and did everything she could to promote entrepreneurship on the island. After working at PREES for a year, she started Think Circle, a consulting firm that worked with governments around the world to develop entrepreneurial ecosystems of their own. She was also able to work with Isenberg to study the key components of economic growth and communicate the findings. Then, in 2013, she and her husband, Giancarlo Gonzalez, launched Piloto 151, the first coworking space in Puerto Rico.

As she promoted her work at Piloto 151, Stolberg began to attract the attention of others on the island. Lucy Crespo saw Stolberg on CNN in 2015, talking about Puerto Rico at SXSW.I thought wow, I need to meet her,” Crespo said.

The two women met in 2016 and discussed collaboration. Stolberg told Crespo about a service that had been integral to other ecosystems on the mainland called SourceLink, a hotline that entrepreneurs could call at any time to seek advice and find resources. But SourceLink was only available in English and didn’t include Puerto Rican resources. They decided to launch a Puerto Rican version of the product. Later that year they partnered with SourceLink to start Colmena66. Crespo and Sebastian Vidal, meanwhile, launched the accelerator Parallel18.

In her work at McKinsey, and later with Isenberg and Rodriguez, Stolberg saw many entrepreneurs struggle to reach U.S. markets or raise money from its venture capitalists. In 2010, a year after she returned to Puerto Rico, she organized an event in New York connecting the island’s entrepreneurs to people in the city’s diaspora community, such as Visa’s chief marketing officer at the time, Antonio Lucio.

Another challenge that Stolberg saw was a media environment that didn’t encourage entrepreneurship.They weren’t highlighting success stories here on the island,” she said.It was hard to get good stories of entrepreneurs that had made it and were giving back. There weren’t many role models that younger people could look up to and say, ‘I want to be an entrepreneur, too.’” But that began to change.

By 2014, Marie Custodio, a writer for El Nuevo DíaPuerto Rico’s largest newspaperbegan to notice the changes taking place in the local startup ecosystem. She convinced her editor to let her write a weekly series highlighting successful entrepreneurs on the island. (Custodio now works at Parallel18.)That’s when you started sensing an optimism in Puerto Rico,” Denisse Rodríguez Colón said.The optimism of knowing there were hustlers building companies and growing.

Vidal, who wore a shirt that readInvest in #growth” when we met at Parallel18’s office, looks at the ecosystem like a marketing funnel. He sees universities as the top of the funnel and one of the most important parts to invest in.If you work with the universities and spread entrepreneurship education, you’re going to start seeing more companies applying to incubators,” he said. Then those companies go on toparticipate in accelerators or receive funding.

Parallel18’s most recent impact report showed that their companies earned $9 million in revenue in 2017. That same year, Puerto Rican companies in the program also raised $3 million and created 168 jobs. Compared to the 174,000 jobs lost between the beginning of the recession in 2006 and 2017, these numbers are a drop in the ocean. But the development and growth of a new sector, led almost entirely by Puerto Ricans, represents a fundamental shift in the island’s business culture.

We’ve always been in a bubble,” Denisse Rodríguez Colón said.We don’t think beyond the island.” She’s not alone in thinking that Hurricane Maria changed that. Rodríguez makes the case that Shop+Hire PR’s impact has yet to be fully realized.Most of the people on this site didn’t have an online store,” she continued.We started offering workshops to teach people how to build a website and sell online.” To date they’ve done five trainings with 175 participants in each.

It’s especially transformational for the freelancers,” Crespo added.In our culture we have been so used to working for someone else that we haven’t built our personal brand or our portfolio. Helping people understand [how to do] that is the future. But we need to scale now.

Historically, we have companies that come here for tax incentives and then leave,” Jose Lebrón explained.The Puerto Rican companies are the ones that stay.” He and his wife, Sheilla Torres-Nieves, hope that Sunne will be one of those companies.

Of course, there’s three million people on the island,” he admitted, thinking of the enormity of the task at hand: remaking Puerto Rico’s economy.It’s a big ship to turn around. Startups take a long time to grow. But it’s happening.” The hope, optimism, and energy is already there.There’s a small but powerful light,” Lebrón explained.

It was there before the hurricane,” Torres-Nieves added.But now it’s much stronger.

About the author

Michael Thomas is a writer, documentary filmmaker, and founder and CEO of Campfire Labs.

@curious_founder

Artwork by

Ricky Linn

rickylinn.com

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