VC Investing in LATAM 💰 | Opportunities and Insights (Part 2) 🎙 The Nearshore Cafe Podcast

Welcome to the Nearshore Cafe podcast, home to the most interesting stories and people doing business in Latin America.

Yeah, yeah, I'd like to hit on that a little bit more and get your perspective. Um, you know, for me personally, uh, I found, uh, you know, I, I lived in Argentina for, for a little over a year and, um, okay, you know, building a company and the And the perseverance and the grit, you know, because there's so many external challenges people are facing.

I don't understand how people manage that. I mean, I'm trying to think about starting or running a business when you're like 100% inflation. I just have no idea where you begin with that. Yeah.

Like we couldn't purchase laptops on credit. You know, everything was in cash and it was, yeah, I mean, just the amount of strikes, inflation, the government mismanagement. And for them, it's just a Tuesday. Right. For like any one of those things would drive us crazy. Yeah. So, you know, as we were talking about just some of the challenges, the external challenges that these people have, they've not caused any of it. They're just experiencing it. What that makes you think about as an investor, you know, when you're, you have to deal with the external as well because that's, that's part of the equation. but maybe that, um, does that make founders more interesting because they've had to develop much more grit?

Yeah, a rose-colored, uh, you know, brush or whatever. I don't know, it's probably mixing my metaphors here. I, I think you have to be aware that, you know, number one, it's a young and growing economy overall. I mean, I'm mixing the entirety of Latin America, but still generally speaking, pretty young. But there's a lot of economic and political issues to be aware of, and that's changed rapidly and frequently over the last 5 to 10 years. And we're still seeing it where, you know, you have governments switching parties, you have, you know, certainly a challenging relationship with the U.S. on some fronts, sometimes good, sometimes not so good. You have administrations like in Brazil that change hands and put the previous administration behind bars. So it's just, you know, and a lot of populist-related issues. So I'm sorry, I'm forgetting the Mexican leader's name or abbreviation is AMLO, I guess. Yeah, well, that's the initials, I guess, is what I'm saying. But he's a little bit more of a socialist populist. And then you have other sort of far extremes on that in maybe Venezuela, Bolivia, and others. But even in sort of moderate countries, there's pretty significant populist sort of stories. And in Argentina, the Peronists, and now maybe Kirchner's. It's weird. And in Brazil, Bolsonaro, who's sort of like a Trump-like figure, So it's— there's a lot going on. I would say for most investors, that scares them off wanting to do business there. And just on the currency risk alone, it's difficult. For me, I guess I would say anytime there's volatility going on, that actually makes me interested. Like, where are the opportunities? And, and I will, I will not tell you who mentioned this quote to me sometime because I thought it was made me jerk my head back when I heard it, but somebody who was an investor in Latin America said to me one time, it was like, you know, where all the beheadings are going on, that's where the action is. And I was just like, whoa, that's maybe not, you know, my investment thesis. But the way that was stated was, you know, yeah, whenever there's like extreme volatility, there's usually extreme opportunity as well, if you know how to take advantage of it. I wouldn't say that that's going to be my lens for where to do investing. But, but there is something to be said for sort of looking at, okay, in a challenging economic environment like Argentina, like somebody's probably, you know, trying to solve problems. And I think if you look at the overall So the thing that was really clear, and this was true 10 years ago, is now today, it's like more than half of startups and venture investing in Latin America is fintech. Like it's like half fintech or two-thirds fintech and one-third e-commerce and then very little everything else. I guess now, you know, probably education, healthcare, and a few others are starting to grow. But fintech is clearly a big part of what people are doing. That's payments, that's lending. Surprisingly, it's not mortgage finance and housing, which is something that has puzzled me. The amount of homeownership, level of homeownership across Latin America is relatively tiny. And even more developed economies like Mexico and Brazil, it's not very far along. I think maybe Chile is probably further along than most, which is puzzling when you look at homeownership rates in the US or North America and even Europe, you're further along. So I mean, some of that is obviously because you have volatile currency, because you have developing economies, maybe property rights and credit scores are not easily available everywhere. But in places like Mexico and Brazil where average GDP is probably $10,000 US equivalent or even more, certainly for some part of the population, it's more. You would think there would be a substantial mortgage finance opportunity for at least the upper 20% of the population. And it's not, it's not there. And I don't know whether it's a lack of government-sponsored entities that are like, you know, the lack of Fannie Mae and Ginnie Mae equivalents in those countries maybe is the reason, but it just feels like that's a huge opportunity to go after lending is a huge opportunity to go after and is being addressed by a lot of folks, small business finance and personal finance. And then, you know, even really basic stuff, you know, so like we went down and we saw a company in Brazil called Motu, which is, I guess they're sort of like leasing motorcycles to delivery people in Brazil. I think they're also involved in managing logistics for DoorDash-equivalent businesses down there. That company's growing huge, like really taking off. I think they just raised a new round, I believe from QED and Bicycle. Bicycle's the new VC fund that was started by Marcel Claret, who was previously SoftBank LatAm. And 2 months later, we decided to jump in and put some money into that through a combination of primary and secondary. And if you ask me 4 months ago, hey, you're going to be investing in a motorcycle company in Brazil, I'm like, what are you talking about? But company's growing like crazy, and it's not really a motorcycle leasing company. It's more like a small business lending company to sole proprietors in São Paulo. And they can't make the motorcycles fast enough to keep up with opportunity there. So like if you have a motorcycle to do delivery, you can double your salary in São Paulo. And a lot of people, you know, can't afford to buy motorcycles, so they'll pay for that on a leasing basis. And for them, it's really like, you know, a functional business loan to get off the ground and start, you know, building your career and your business. And I think there's a ton of opportunities like that where If you're willing to do a little bit of high-risk stuff, you can certainly get paid well for your investment. And I think there are certain places that don't seem like a tech investment, like renting motorcycles. Is that a tech company? But turns out, well, yeah, it actually is. And if people stop making payments, they can turn off the bikes remotely, which is kind of cool. They're not just selling the bikes, they're also providing logistics support. And so we visited the place where they're, you know, one part of the house was these guys, you know, working on and fixing the motorcycles and building the motorcycles. Like I thought like was in the shop, you know, shop shop where, you know, motorcycles up. And then the other side of the house looked like a call center and they had this like floor of people like, you know, on headsets and, you know, lining up people for delivery. And I was like, wow, this is, pretty cool combination of sort of like, you know, high tech and low tech, uh, in an emerging economy. But clearly, I mean, the company I think is growing 60, 70% per year, and I think approaching $100 million in revenue. I'm not quite sure. So, uh, really interesting opportunity. Um, and I think, again, you're seeing that all over, you know, Latin America is undercapitalized opportunities. And even now, I think that was true 10 years ago, it's still true. There's not a lot of people jumping into venture capital investing in these markets because some of the same issues we were just talking about. So it's nowhere near like what you see in the US or Europe and not even what you might see in Southeast Asia or India, which are other developing economies, which do have a good bit of capital. Going at them.

Yeah. Yeah. On that point, I wanted to ask you about valuation multiples and liquidity. How does that look?

Much more reasonable on valuations, much less on liquidity. My partners and I were talking about this, like, okay, how much are we going to start putting into Latin America? And we'd actually just hired a couple folks part-time to work on some projects down there for us. So we're leaning in a little bit. I mean, it's not the majority of what we do, but we're starting to allocate maybe 5% to 10% of our capital there. Prices are very reasonable. So that's one attractive component is, I think, not to quote too many things, but in some opportunities we're looking at multiples that are only 4 to 6 times revenue, which is unheard of here in the US. You're going to pay 2 or 3 times that you know, for fast-growing opportunities in the US. So that's super interesting that you can get in on the ground floor on some stuff that isn't, you know, crazy expensive. On the flip side, liquidity is, you know, a little bit more limited. You're not going to see much of an acquisition M&A market here, excuse me, in Latin America. And although there's been, you know, some recent IPOs and a lot more in the wings, The ones that I mentioned before, I mean, MercadoLibre way back and DLocal and Nubank and others more recently, still kind of few and far between. Um, so I don't think you should jump into the Latin American market expecting that, you know, you have a short path to an IPO or a very high probability path to an IPO. Um, so there's some very different factors in these markets that limit the exit opportunities. But again, I think if you're willing to take some risks, there's incredible growth opportunities. And hopefully, the liquidity story gets better over the next decade. I think you are seeing more non-US, I mean, non-Latin American investors going into the market because of some of the situations with China. You're seeing huge opportunities for growth in places like Mexico, I think China itself is a big investor trade partner for a lot of South American countries for both, you know, for agriculture and potentially for oil as well. So I do feel like if you're playing the long game, Latin America is a huge growth opportunity that I think has been overlooked by a lot of the rest of the world, maybe with the exception of Spain and Portugal have some long-term connections to the markets down here, down there.

Yeah. I was going to ask you with the liquidity too, maybe how that lines up with your day job with PVC. Because there's a lack of liquidity, does that make it more interesting to buy positions? Yeah.

Yeah. So for folks who are not aware of what we do, we're a secondary market investor. We buy positions in companies, which we call direct secondary. We're buying out other shareholders in companies or sometimes, you know, founders and employees. Um, and then at the fund level, which is a little bit more what we do, we buy positions from other limited partners or investors in funds and sometimes from the general partners or the VCs who run those funds. Um, because, you know, funds usually have a 10-year horizon, which is really in most cases more like 12 to 15 years. And that's a very long time for most investors to wait for return of capital. Even for individual companies, IPOs are taking closer to 10 years now. So there's a lot of investors in companies and funds who are, you know, not necessarily willing to wait 10 to 15 years for their returns and might be looking for liquidity in more of a 5 to 7-year horizon. And so we will take in, we'll step in and take some of those opportunities off the table and buy some folks out. Again, I would say given the market conditions and given the situation, those are pretty reasonably priced from our perspective. For those folks, you know, might be that they're taking a haircut on some of the on-paper value to get to cash, but in the current market, people are really looking for any kind of liquidity and cash. And a lot of folks who jumped into tech investments in those markets might have been waiting for a long time. So that's presented some really, you know, quite compelling opportunities for us to consider going into those markets. And again, this wasn't necessarily on my radar a year ago, even though we have done a lot in the past in Latin America. But after we looked at it, we're like, wow, there's some really great companies that, you know, are going to have still another 3 to 5 years before they get to a liquidity event. There's some investors in those companies who are looking for cash today. And that gives us a really interesting, not too crazy long, you know, window. If we're willing to be a little bit patient for another, you know, 3 to 5 years, we can see some, some great opportunities, assuming we're managing the risks of getting to liquidity, which are, which are still there for anybody jumping in. And all the things we just had discussed before about currency risk and political volatility issues. But I think because we are diversifying across multiple companies, multiple geographies, and we have a fund approach, that's easier for us to do than someone who's just an investor in a single company or fund or geography. So we can manage that risk a little bit easier because we have a more global perspective and a little bit more diversified perspective.

Yeah. Yeah. Dave, I got a couple fun questions here as we start to wind down.

Sure.

In your, your 3-country trip to Latin America, I know you, you ate a lot of red meat.

Was there— I had to get back on the gym after that.

Yeah, me too.

Manage.

All I wanted to do was eat vegetables after, after my time there.

I did. I needed a vacation from meat when I came back from down south.

I was like, anybody got any spinach?

I could go for that. Although, again, there was a lot of fresh fruit there too.

But I was curious if there's any one particular meal that stood out in your time there.

There were several. And I'm trying to remember. There was one restaurant in São Paulo which we had been to before that had this huge tree growing in the center of the restaurant. It's pretty famous, I think. And the meals there were just fabulous. And then I guess, you know, well, it's hard to pick one meal because they were all amazing. I think we had dinner in one place in Montevideo or Punta del Este, I think it was Punta del Este in Uruguay that was just incredible. And someone else, again, who I will not name drop, was kind enough to pick up the tab. So it was even more amazing. Thank you, Renan. But yeah, it was just, you know, I, I think for a lot of folks who've had, you know, South American cuisine before, it's, it's a lot of comfort food.

Yeah.

Yeah. So you do kind of taste amazing, but you do have to sort of watch your, your carbs and blood pressure a little bit after that. Yeah.

If you're, if you're paleo, you can do okay. You know, just, just meat and fruit. But those empanadas are are pretty good too.

Yeah, I think probably the most memorable experience for me was I'm not a Spanish speaker, but I managed to download and order door delivery and pay in another currency. And it took me a while to figure out what I was doing. I had to sort of translate while I was looking at the order, but I managed to have someone deliver to my hotel room, which was pretty cool. Yeah, there's so much opportunity to go after down there. I think really, again, it's overlooked by US investors, even other people who are interested in emerging markets. I think it's been overlooked historically. And yet some major cities in Mexico are shorter to get to than people going from San Francisco to New York. So it's really right under your nose. There are more people now visiting Mexico City, I think, all the time. A lot of people are realizing huge growth and vibrant city and multicultural, multiethnic city. And so I would really encourage people to sort of check it out. Getting down to South America is a little bit longer trip. We didn't even talk about maybe the Caribbean and Central America, which is also pretty accessible. There's certainly some security risks and concerns to be aware of, but there's also just some great culture and some great people. And depending on the time of year, some incredible weather. I have some friends who are building kind of an eco startup community in Costa Rica and some other friends who are working on that in Honduras. I do think there's interesting sort of digital nomad communities spread across different parts of Central and South America to check out as well.

Yeah. Last question for you, Dave. As you picked up a little bit of Spanish, you made your delivery order. Do you have any favorite Spanish words or phrases that you picked up?

Dude, I absolutely am horrible at— I mean, I learned to pronounce Spanish in high school because I was a singer, and so we had to learn all the Latin languages and everything. But so I know a little bit from, you know, actually more just understanding of other languages. So hola is my only really— hola, gracias— like, about that all I can really manage, which is horrible because it's not that hard a language to pick up. But I guess I have more opportunity to get exposed to the culture there.

Good.

Maybe Google Translate and some future Babelfish will help me get there faster. Awesome. ChatGPT for Spanish, whatever. There you go. Good.

Well, Dave, this is a blast. You've been so generous with your time. I know you're a busy guy. This is Saturday morning for you as well. So thank you again. Really pleasure to have you on the show.

You bet. Yeah. Yeah, a lot of fun. Good. I encourage folks who haven't visited to check out and, you know, go see it yourself.

Yeah, absolutely. Like you said, the opportunity there is huge.

And if any of your listeners are interested, we're planning to do 42Geeks trips to other parts of the world next year. So again, the one coming up in Asia we're already maxed out on, but I think next year we're going to be looking at possibly Africa, North Africa, probably Morocco.

Oh, interesting.

I think we're going to come back to Southeast Asia and check out Indonesia and the Philippines. And then I think, still thinking about it, but probably South Central America. So we might, we might visit. Interesting folks. Yeah, I think, I think we'll probably check out Honduras and Costa Rica and maybe a few other places. We'll see. So 42geeks.com if you're interested in nerd tourism and, uh, hanging out with startups, investors, and eating a lot of great food.

Love it. That makes a great trip. And that's, uh, 42geeks.com is the website, right? You bet. Yeah, you bet.

Just amount that you can fit on a bus. I love it.

Well, Dave, thanks again. Let me thank our sponsor real quick. That's Plug Technologies. Great way to find, uh, software developers all over Latin America for US companies. We'll see you next time in the Nearshore Cafe. Thanks again, everybody.