“Entrepreneurship by necessity” mindset fuels the growth of LatAm startups pre- and amidst Covid-19 pandemic

Recession is an accelerant to innovation on the markets where founders have to bootstrap their way to profitability and focus on solving major existing market inefficiencies.

Source: forbes.com

With the most recent $400M Series G raise Nubank got to a whopping $25B valuation, up from $10B in 2019. Beyond becoming the fourth-most valuable financial company in LatAm, Nubank is the largest challenger bank in the world: its user base has nearly tripled from 12M in 2019 to 34M today. That news made me re-visit the post I published here just before graduating from Stanford GSB earlier this summer.

As Latin America’s role in the technology industry continues to expand, Brazil caught my attention, so much so that in December 2019 I took a 20-hour flight to Sao Paulo to spend next three days meeting with major tech ecosystem catalyzers. I was eager to understand the factors that have led Brazil to become the hometown to over 12 (!!!) billion dollar-tech businesses in the last 2 years. Despite a notoriously complex bureaucracy, political corruption, and economic volatility, the country’s tech scene was flourishing in 2019 as Brazil once again accounted for the largest share of VC deployed in Latin America, receiving 50.5% of $4.6B total capital invested as per a LAVCA (Latin America Venture Capital Association) report. All but one transaction over $50M involved a cross-border co-investment, signaling global cooperation to support startups with significant traction.

Source: cbinsights.com

With 91% of WhatsApp penetration, more than 6B apps downloads per year and over 230M smartphones in usage among Brazilian internet users creates an interesting ‘free-riding’ opportunity for Brazilian tech-companies.

The statistics are impressive on their own. But what resonated the most during that trip was the resilience of Brazilian entrepreneurs, their scrappiness and their desire to address the inefficiencies in their own country and the region before attempting to take over the world. I got to know NuBank and Movile whose hundreds of millions of dollars in revenue, high valuations, and global recognition are the by-product of this simple and clear mission.

When Hernan Kazah and Nicolas Szekasy, two of the most prominent executives in Latin America’s most highly valued tech startup, MercadoLibre, initially launched KaszeK Ventures in 2011, the goal was to attempt to replicate their entrepreneurial success. They wanted to leverage the expertise and wisdom they’d amassed from their time running what is now a US$86.05b company by market capitalization. One investment by their first relatively modest $95m fund hit the important milestone of generating the outsized returns that existed in the Latin American market. This investment was Nubank, which at that stage was little more than a pitch deck and entrepreneur David Velez.

David Velez hitched a free ride on the massive mobile phone adoption rate and reliable cellular phone service to reach unbanked Brazilians in rural areas while attacking an inefficient bureaucratic banking system of one of the world’s biggest market. Nubank has become one of the most valuable startup in Latin America and has raised $820M across 7 venture capital rounds with the last round at over $10B valuation from investors like Woody Marshall of TCV, whose active investments include Spotify, Airbnb, Electronic Arts, Netflix and Peloton. Nubank has reached 12M customers for its various products, making it the sixth-largest financial institution by customer count within its home market and the largest digital bank outside of Asia. Given Brazil’s population of 212M, Nubank still has substantial scope for growth domestically and a massive opportunity to scale to other markets in LatAm and beyond.

Fabricio Bloisi and Eduardo Henrique built Movile into tech unicorn and the largest company in Latin America’s mobile commerce industry with more than 150M monthly active users of its apps, estimated revenues over $240M and $375M in venture capital from backers including Naspers and Innova Capital almost exclusively through consolidations. Movile successfully implemented an unprecedented strategy of mergers and acquisitions by investing in more than 20 other mobile companies including PlayKids and iFood and expanding to food delivery, ticketing, gaming, and education with a goal to touch lives of 1B people. Movile’s philosophy is to always take as much risk as possible. The capacity of a company to evolve and continue to innovate is more important than the initial idea that the company was based upon. Movile is obsessed with aggressively achieving results, meritocracy and innovations. Remarkably, it has 100-day deadline for integration of each newly acquired asset.

Going forward, Brazil’s unicorns will likely expand beyond the industries that have nurtured them thus far — large fintech, delivery companies, and mobility apps. As Julio Vasconcellos, co-founder at Canary Ventures and Atlantico, said during a webinar hosted by LAVCA and SVB, “the sense of urgency created by COVID-19 removes or significantly loosens adoption frictions in highly regulated sectors. As a result, we will see accelerated transformation of big sectors such as healthcare, education, infrastructure and logistics.” Vasconcellos also suggests that change in these industries will follow a similar trend to that of financial services: tech startups will unbundle stacks and offer different slices, for example, in healthcare, and deliver them better than incumbents. Once market validation is achieved, they will start bundling different services.

On a personal note, I am convinced that the future of venture capital on a broader global scale lies in studying successful venture and tech models originated outside of Silicon Valley and even USA and adopting them domestically. Recent developments in Brazil, emergence of successful entrepreneurial stories in Mexico and Colombia and rising activity of leading US and Chinese investors in Latin America paired with the overall sustainable growth dynamics of tech companies (think extended bootstrapping period and positive unit economics at scale), higher return on average among LatAm venture capital firms are some of interesting signals. I believe that successful stories of NuBank, MercadoLibre, and Movile will create long-term performance benchmarks and much needed inspiration for new generation of entrepreneurs to dream big and take control over fixing inefficiencies in their countries. We will see more and more young people pursuing degrees and career in tech instead of becoming doctors and lawyers.