Michel Friedman - GP at Reflect Ventures

Welcome to another VC Wisdom podcast. We have Michel Friedman with us today. Michel is GP at Reflect Ventures. He's helping accredited investors build in emerging markets. And yeah, it's mostly startup portfolio with small ticket. Michel invests in B2B, B2B2C areas where digitalization enables huge economic gains in Dubai. Not sure if you were in Dubai last time, Michel, but Michel was on the pod first time. Uh, smart guy with contrarian opinions. Welcome again, Michel. Tell us a bit more about what you're up to.

Great. So we're a syndicator and raising a fund. We invest in supply chain, distribution, logistics, and fintech in emerging markets. We actually haven't done any investments in Dubai yet, but we've got investments in Africa, in South Asia, in Latin America, Southeast Asia, Central Asia, right? And it's all the same kind of thing. It's very much, you know, B2B, B2B2C, operationally intensive things like trucking on demand, financing for gig workers, those kinds of things. All of them very— all of them inherently local. The one thing that we're never going to do is try to invest in a company that may have to compete against Silicon Valley or Bangalore or Tel Aviv. That's just stupid, right? When you're doing that from Nigeria or São Paulo or whatever, you know, you're starting with an automatic disadvantage. You want companies where their location immediately provides a barrier to entry for anybody who isn't also in that area. And by the way, that's a very real issue. You know, I was in Nigeria 2 weeks ago, And there are billboards all over Lagos from Zoho. I don't know if everybody knows what Zoho is, but one of the— it's a big Indian SaaS company. And all the billboards are saying, your revenue's in naira, your expenses better be in naira, go with Zoho. And they're going— then they're out there, you know, accepting payment in naira, unlike most of the global SaaS companies. And using that as a competitive advantage to enter Nigeria. And I sure as heck wouldn't want to have invested in a Nigerian company if I had to compete with them.

Makes all kinds of sense. That thesis, I like it. Makes me think a lot of Rocket Internet, right? Like, there is a moat to be like in a specific culture, understanding how they're buying the intricacies of language and Meaning and understanding the economy of a place, and which an American company cannot fuck with, right? Like it's definitely not; they're definitely not going to launch that the cost rewards equation is not worth it for them. What has changed since last time we spoke? Last time we spoke a lot about AI. Like let's say it's been a year and a half ago. What's new in in your life and in Reflect Ventures?

Well, everybody's using AI, right? AI is definitely all over emerging markets. A lot of emerging markets people are not even really comfortable using apps. It's all WhatsApp. And, you know, people, you know, a lot of the lower-level people, people like truck drivers and stuff like that, they are moderately literate, right? I'm not going to say that they're illiterate, but they They definitely prefer to do their communication orally. And so what they expect to be able to do is to send a voice message on WhatsApp and get a voice response. And everybody's building WhatsApp chatbots, which can take the— which can understand those messages in local languages and respond in local language, right, orally with a voice message. And that's being used for things like, you know, routing trucks, telling people when a truck is going to be late, nagging people that their payment is late, all of these things. And, you know, emerging markets are going, you know, I would say they are fast followers, right? So for example, there's a company in the United States called Augment, and they're building AI-powered logistics in the United States with AI agents that work with the trucking companies, work with the shippers, work with the receivers. And we've got about 6 investments into trucking on demand in emerging markets everywhere from Brazil to Mozambique. All of those guys are looking at Augment and they're saying, how can we deliver 50% of the value with 10% of the effort, right? What are the low-hanging fruit we can copy from what these guys are doing? So they're fast followers.

And in the case of your investments, have you got any exit in the last year? And what have been new investments you've pulled since then?

So we haven't done any exits, right? Exits take a long time. Exits, a good exit takes 10 years minimum, you know, unless you're Very lucky started, right? SpaceX took about 10 years to go to exit. It's just it's kind of masked by the fact that a lot of people came in at valuations of well over a billion dollars, multiple billion dollars. You know, and they had a shorter time period. But anyone who was investing early stage in these companies, they had to wait. And you know, same here. Some of the companies we've invested in though. I'll tell you some new investments. We invest in a company called Jelt. Jelt is a Colombian company doing distribution of medical supplies to medical clinics, and they're now opening up in Miami. And, you know, the founder, he's Colombian. I was talking with him and he's like, look, it's really simple. In Colombia, I sell to Latin Americans. In Miami, I'm going to sell to Latin Americans. If you've ever been to Miami, you drive around, you see all of these adult daycare, kidney dialysis clinics, rehab clinics all over the place. And 3 quarters of them, they're managed by people from some part of Latin America and very frequently Colombia. So he said it's a natural progression. Other companies we invested in, I don't think we had Uh, last time I talked, we invested in a company called Monaco. Monaco is, uh, theoretically a French company, but they operate in Francophone Africa. They have navigated the regulatory barriers, which are considerable, in order to be able to offer Africans whose addresses are in Africa or not living outside of Africa euro and USD bank accounts held by a European bank, and a US bank. So that is a huge thing. If you are someone from Ivory Coast and you have to take a trip to France, your credit card from Ivory Coast, there is no guarantee it's going to work for you in France. You're going to go and try to use that credit card paying in euros, and very quickly you're hitting your— there are issues with exchange rates, huge costs to doing this. The, um, your bank is going to be getting nervous. It's a major problem. But if you are able to go and use a bank account that's actually in Europe with deposits in euros, well, then you can pay for whatever you need to do, whether it's, you know, you're going to university, right? Maybe your, your dad set it up for you. you're on a business trip or whatever. So these are big things. They're also used by traders, by the way. Africa buys an awful lot of stuff from China. And there's a whole industry about making that possible, setting up the payment rails, a lot of stablecoin payment rails. And then you do have to wonder about the Chinese people on the other side of this. China has banned crypto because they don't want money going offshore. But you do have to wonder how many of the people who are shipping product to Africa, whether the stablecoins are getting converted to renminbi and brought onshore into China, or whether these people are building up a store of stablecoin outside of China for themselves. All sorts of fun things are happening there. Another company we invested in, really interesting, in Brazil, a company called Sotac. SOTAG runs a discount program for petrol for professional drivers. Professional drivers, say an Uber driver, you probably spend more— you definitely forget about probably— you definitely spend more on gasoline than you spend on buying your car. Over the lifetime of a car, you're going to spend more on gasoline. So if you can save even a couple of pennies a gallon It actually makes a pretty big difference to your take-home pay. Now, what SOTAG does, they've got a program with gas stations. They give— again, if you're the driver, you take your phone, you go onto SOTAG's app, you look for the nearest gas station that's in the SOTAG program. You see the discount that gas station will offer you. You drive over, they scan a QR code. You fill up your tank at a discount. You pay with the SOTAG wallet. SOTAG has now implemented a wallet, so they're handling the whole payment. And then from the gas station's point of view, first off, they got marginal revenue. You wouldn't have driven over there if you weren't getting that discount. But then number 2, even more important, the fuel distributors give the gas stations a discount. Depending on how much gas they're able to sell each month. So the more gas they sell, the higher their margin, not just on those additional customers that SOTAG brings them, but on every customer they sold to for the entire month. So they will pay SOTAG a commission on every liter of gasoline that they're able to sell to a SOTAG user, to one of these professional drivers. So that one's going well and growing quickly. We've introduced them to a number of companies in places like Africa, Turkey, etc., that are really interested in licensing the technology and implementing their own fuel discount program because it's just a no-brainer. How do you compete with—

if you have like a net that is that wide, right? Like you invest in most parts of the world except US and Europe, I guess. And you, you cast your net wide enough in so many sectors. How do you compete with, say, a LATAM investor or Colombia-focused investor, right? Like, how do you sell that to your LPs?

Well, if you're a LATAM investor, you usually do not want to invest in direct competitors. And the companies you're investing in, pretty quickly they are going to be competing with each other if they're in the same sector. So you have to keep going from one new sector to another new sector to another new sector. And each time you have to learn a new sector over and over again. You do one investment in trucking on demand, okay, you're done. Now you get— you do another investment, maybe in ride-hailing. Okay, you're done. You've made your ride-hailing investment. You're not going to be able to do it again, because if you do, it's going to be competing against the one you already invested in. Now, for us, on the other hand, we've invested in trucking on demand in, let's see, Mozambique, Kenya, Pakistan, Turkey, Georgia, the country. And Brazil. 6 investments in 6 really similar country companies but operating in different markets. And we can look at them, we can understand how they work and why each time we do a new investment in this space, we're able to do it better because we understand it better. And as these companies begin to bump up against each other which is happening, for example, between the guys in Georgia and the guys in Turkey, or the guys in Pakistan. We introduced them to Port of Djibouti, and they're now bumping into the Kenya guys. Kenya guys are entering Ethiopia from the south. They are entering Ethiopia from the north through Port of Djibouti. Djibouti is basically a port for the country, little pimple on the edge of Ethiopia, and 80% of the product going into Djibouti Goes down to Sabah. So, you know, we introduce these guys to each other. There are opportunities for cooperation. They can do a network the same way the airlines have a network. You know, you buy one ticket and it takes you across on 2 different airlines, 3 different airlines to get to your destination. That can be done with trucking as well. We're able to add value that way. So You know, this is the benefit that we have that someone who is only investing in one market just cannot duplicate.

And out of all these investments, which one was the least obvious but looking back like the best bet you've made?

Obvious. Darn, I'm trying to think because there is a sense in which all of these investments are obvious. If you think about what you need in emerging markets, it's all about mandatory spend. By definition, people in emerging markets are by and large Poor, and they don't have a lot of discretionary spending. So we're always looking at the mandatory spend. What do people need to spend money on, either to make money or to get the essentials of life, right? You need trucking. The trucks stop rolling, and a week later the food riots start. There will always be trucking everywhere. So in that sense, these are very— Obvious deals. What might be non-obvious is where you're going and looking for them. Right, you know, most people don't want to fool around in these places, right? But, um, at the same time, that's the advantage. You get in, in companies with a $5 million valuation where if they were operating in the United States, you'd be talking about a $30 million valuation.

The market is quite busy right now. Lots of new VCs, right? Like, where do you see emerging managers fail?

Emerging managers as opposed to emerging markets managers. Most emerging market— so most emerging managers, let's face it, they fail because— and I've talked to a lot of emerging managers— most emerging managers do not understand VC economics. You know, I talk to people who are raising $5 million with a partner, and they're already arguing about what is the split going to be for the management fees. And it's like, hello guys, on a $5 million fund charging 2%, your management fees are $100,000 a year. Your operational cost Right? What you're paying to the fund administrator and all that, it's going to be about $50,000 a year. You got $50,000 a year left over. And if you're someone who's fighting partner about $50,000 a year, meaning it even splits just $25K a year, you're not, you're not in a position to be raising a fund, right? You need to go and accumulate more of your own capital to be in a position where this isn't going to really matter to you. And these people don't get it. They're either going to— if they, if they're successful, they're going to raise a new fund quickly. You do a $5 million fund, $10 million fund, you do a $30 million fund. If you're unsuccessful, you're going to give up after 3 years or 2 years when you begin to realize just what the economics are. And then hopefully You're going to be responsible enough that, yes, you go get another job, a full-time job that pays you a salary, but you take care of your LPs. You better make sure if you're doing with an emerging manager who's got a small fund— Interesting.

Michelle, I think you lagged out. Okay, I think you're back now.

Charles, you appear to be muted.

Yeah, I think you lagged out for quite some time. Um, sort of missed out the, the last couple of seconds of what you—

Do you need me to repeat my— Yeah.

What was the last part?

Okay. What I said is that most emerging managers, they're either going to give up in 2 to 3— if you got an emerging manager with a small fund under $10 million, in 2 to 3 years, he's either going to raise another fund, in which case he may move forward more, or he's going to give up. And then he's going to go get a job or do something else where it's actually going to make him some money. And hopefully he has the integrity to spend the next 10 years effectively uncompensated taking care of his LPs. And if you're going to invest with an emerging manager, you need to have confidence in his integrity.

Yes, for sure. Are you raising another fund this year? Uh, what's, uh—

We are. So we've been operating as a syndicator, and I can't really talk about raising a fund, unfortunately. That's public, and that would make it a Uh, public offerings.

So, what are your main goals for this year?

Main goals for this year, we're doing a little bit of hiring. We want to get much more AI-enabled. Um, small managers, you know, everyone's using obviously chatbots to do research. Uh, people are trying to use AI to write documents, but it is It's challenging if you're actually trying to do a good job on the document because the document, you know, they don't— when you're using AI to write a document and you say, go change, you know, this one paragraph, oh, it'll change things all over the darn document. Right? You can certainly use Google, you know, Google's built-in AI writer within Google Docs to try. doing writing, which is better at dealing with that. But it's not— you can't go and hand that writer 10 documents from, you know, like the deck and the financials and everything else that you've collected from the company. So it's actually quite hard when you're one of the smaller funds that doesn't have a lot of IT infrastructure to make effective use of AI beyond the very basics of research. Oh, go write a paragraph and I'll cut and paste it in, that kind of stuff. So we're trying to make better use of it. That means we're building tools, which of course is overhead, but it's a heck of a lot easier now than it used to be, right? We use Cursor. And we're building tools integrated into the Google ecosystem to make better use of AI for ourselves. The other risk there, though, and that you always have to work on, and I have issues with this with my analysts, is that people tend to turn off their brain when they are able to turn on the AI. You know, you read a document, it seems logical and well thought out, and then you reach a paragraph and you're like, I don't follow. And you ask the person responsible for the document, and they look at it and they're like, I don't follow either. Although they don't really want to admit it because, you know, they didn't write it themselves. It got written by the AI, and they didn't bother reviewing it and asking themselves, what does this paragraph mean? Does it make sense? And going through it paragraph by paragraph. So you got to do that. The AI right now is a valuable tool. If it can replace you, then you have no value.

How do you recruit your humans then nowadays? What traits do you look into them?

Well, I mean, what we're looking for first off is someone who, you know, you gotta be smart. You gotta understand your way around a balance sheet, a balance sheet, financials, etc., because these companies, they live and die by things like cash flow. And you run out of your cash, you kill a company. And you'd better understand, right? If you can't understand, for example, that a company with a 60-day cash cycle that is growing quickly and is profitable can still run out of cash because as it grows, it needs to put more and more money into working capital. And as you put more and more money into working capital, into inventory, into accounts receivable, That has to come from somewhere. Where does it come from? Comes from your cash, right? So you can literally be profitable, growing fast, and then you're not exactly bankrupt, but all of a sudden you hit a wall. You have no cash, right? You have to be able to understand this and see it, be able to advise the founders that they're, they are potentially going to be hitting an issue going forward because you're reviewing their documents. Many of these founders are not accountants. So that's number one. Number 2 is able to think carefully and clearly about business models. When do companies really have a moat? Do they still have a moat in an AI-enabled world? That's one of the things we're worrying about more and more now. As AI becomes more and more powerful, is someone going to be able to just use AI to duplicate what you've got and push you out of the market just by investing a bit of money or by being a bit better with AI. That's another reason why I don't want to invest in any SaaS tools. It's, um, you know, it's pretty scary now what you can build with AI, you know, effectively for free. And also, have we done what?

Deep tech?

We've not done deep tech. Deep tech, you have to know that particular tech very, very well if you want to do deep tech in a responsible way. And you'd better then be very specialized in just that one area if you're a small firm. You know, otherwise what you're doing really is you are being, you know, you're following along. Oh, this is this company. They're doing deep tech. It sounds cool. They got some decent investors who I trust. Great. I'll throw in a check as well. Who can actually know space and AI and chip design? No one person can know all of these things. So you're not able to make your own judgment.

Right. Well, Michel, thanks for being on. Uh, where can people find out more about you and Reflect?

www.reflectventures.com. You can email me, you connect to me on LinkedIn. If you connect to me on LinkedIn, please write a message in your connection request. I generally ignore anyone who connects without putting in a message telling me why I should go and accept their connection.

There you go. It's always