The Latin American Startup Opportunity

By Sonya Huang and Doug Leone

Just over a decade ago, a bright young MBA student from Stanford walked into Sequoia’s offices on Sand Hill Road and fervently articulated the opportunity for startups in Latin America. That student was David Vélez. We were immediately taken by David’s presence, ambition, and intelligence, and hired him to chart out a course for Sequoia in Latin America.

Having grown up in Colombia, David viscerally understood the opportunity ahead in Latin America: while the real economy was rife with problems, the digital economy held enormous potential, supported by some of the highest rates of internet penetration and social media engagement globally. However, as David dug in and met dozens of startups in the region, he gradually reached an uncomfortable conclusion: despite the compelling market opportunity, the startup ecosystem was underwhelming. Most founders weren’t thinking big. They were importing “X for LatAm” ideas from the U.S., without solving real local problems. There wasn’t enough technical talent to support large company creation. And there weren’t enough success stories to galvanize founders and engineers.

Despite our desire to open up for business in LatAm, we collectively agreed to take a step back. However, we knew how special David was, and we were determined to work with him. Soon, David decided to seize the opportunity by becoming a founder himself. He had a big and bold (and crazy!) idea to take on the banks in Brazil. We co-led the seed round in Nubank in 2013 together with local investor Kaszek Ventures.

Eight years later, Nubank is the most valuable challenger bank in the world, with 40 million customers. And today, the startup ecosystem in Latin America is flourishing. Founders are emboldened to think big by the meteoric rise of companies like Nubank and Rappi. Engineers are leaving their safe jobs at banks and retailers to chase the startup opportunity. There is no backlash against “big tech” in Latin America; there is a positivity and optimism about the potential for technology to change lives.

Looking back, the thesis that David Vélez developed for Sequoia a decade ago was spot on — it was just too early. Now, that opportunity is here. Our mission at Sequoia is to help the daring build legendary companies. Now more than ever, we see that opportunity in Latin America.

Nubank: Latin America’s David and Goliath

David Vélez likes a challenge. When he tried to convince Sequoia to make a seed investment back in 2013, he admits, “the probability of not succeeding was very high.” His pitch deck was so speculative that as Doug Leone remembers it, “there was no pitch. We invested 80% based on him, and 20% based on our shallow understanding of the market opportunity.”

The market opportunity turned out to be quite deep. And David still remembers one thing from that pitch very clearly. “There’s a slide of David versus Goliath, which was what we wanted to do — we want to go against the biggest banks as a little startup.” Despite sharing a name with a giant-killer, he says, “That story for any Latin American investor was a no-go. You just do not attempt to fight the big guy.”

David had the advantage of spending time in Silicon Valley where David and Goliath stories are the rule not the exception, and where investors like Sequoia embrace this kind of risk-taking because of the scale of opportunity. David was the perfect outsider to disrupt the Brazilian banks. Perhaps because he wasn’t Brazilian, had never worked for a retail bank, and didn’t know how the credit card industry worked, he wasn’t satisfied with the naysayers’ explanations of why challenging the big banks was impossible. “When I pushed, they tended to be very shallow arguments,” he says. The first crack of daylight appeared when he went to visit a regulator at the Central Bank of Brazil in Brasilia and was surprised to find that they welcomed more startups and competition in the banking sector.

Nubank set up shop in a small nondescript house in one of Sao Paulo’s less fashionable neighborhoods, where thirty people sat shoulder to shoulder racing to launch their first credit card product. “We say that that first office was the best interview filter we could possibly have wanted,” says David, “because the right type of people self-selected into wanting that experience.” More traditionally-minded applicants in suits and ties took one look at the house and didn’t even ring the bell.

Perhaps the most controversial early move was choosing the name for the company itself. Doug told David that his original name, EOS, was “a very nerdy name — you need a more consumer friendly name.” This prod led the team to articulate how different their culture was going to be from a traditional bank. They liked Nubank because “nu” in Portuguese means “naked,” as in the naked eye, bare hands or a blank page. “It was a bit shocking,” David admits, “but it reflected very well, some of the values of transparency and simplicity, of no branches, of no layers — what you see, is what you get — which was going to be one of the differentiating factors of the company.” And, turning “nu” upside down reveals another easter egg — “un” — the anti-bank.

To make sure consumers got the message right away that Nubank was different, they purposely chose the most shocking color a bank would never use: bright purple. Now, that bright purple card is in the hand of 40 million Brazilians.

The Startup Economy: Then Versus Now

David Vélez’s story is nothing short of extraordinary. But he is not the only founder that has found success in Latin America. Fellow Sequoia portfolio company Rappi has built a formidable super app delivery business that now reaches 10 million consumers. Brazilian real estate company QuintoAndar has changed the experience of renting and buying a home. Mexico’s Kavak has enabled tens of thousands of households to achieve car ownership. Brazilian mobile gaming studio Wildlife Studios has found global success. And behind these later stage startup successes is yet another generation of young, early-stage startups.

We have been blown away by the quality of founders in the current wave. They have struck us as having large-scale ambition, strategic thinking, a tight grip over metrics, operational excellence, and infectious energy and passion for what they are building. Spurred by the success of companies like Nubank and Rappi, these founders are thinking big, unafraid to attempt the impossible. And, having seen the playbooks for startup success, they are hiring and executing fearlessly to make their dreams a reality.

The businesses are also far more interesting than a decade ago. We are meeting far fewer bland “X for LatAm” pitches; rather, we are seeing founders who deeply understand the local market problems and are solving them in a local market way. They know how to solve the local chicken and egg problems — for example, the lack of credit access and delivery infrastructure — in creative ways.

The startup economy has energized not just founders, but engineers. The big banks in Brazil each employ tens of thousands of engineers. The same goes for other sectors of the economy. We’ve found that engineers are increasingly becoming drawn to startups and leaving their safe desk jobs to pursue far more interesting opportunities.

The Opportunity Ahead

Latin America is one of the largest economies globally, with 600M people and $6T of GDP. To put the sheer size of LatAm’s economy in context, the population is twice that of the US, and GDP is 40% of China’s and 2x the size of India’s.

But, LatAm’s real economy — banks, hospitals, infrastructure — is not delivering. Infrastructure lags developing economies (the quality of roads/infrastructure is lower than China or India according to the OECD). The public health system is spread so thin that private health insurance is a “top 3” consumer wishlist item. Brazilian banks enjoy some of the highest returns in the world. E-commerce penetration is only 6% because of the lack of innovation in delivery infrastructure and the lack of access to online payments.

This sets the stage for technology to eat into the real economy and deliver fundamentally better consumer experiences. Nubank has not only survived three recessions since inception, it has flourished, and it has helped 40 million consumers save $5 billion in bank fees. As David points out, that’s $5 billion potentially invested in new services.

In fact, LatAm is the ideal setting for the internet economy to disrupt the real economy. LatAm is home to a relatively young population that is internet- and mobile-native (internet penetration at 70% surpasses China/India at 59/50%, and mobile internet penetration at 67% surpasses China/India at 56%/50%). Latin American countries have some of the highest internet engagement rates in the world, averaging >9 hours per day of internet usage (closer to 6.5 hours in the US and the rest of the world). In particular, Brazil has been a consumer internet heavyweight for global messaging apps (Brazil is WhatsApp’s #2 market after India) and social media usage (Brazil has the fifth largest population of social media users worldwide and the largest outside the U.S. and Asia). Moreover, Latin America is home to a rising middle class that is now purchasing healthcare and education, cars and homes, delivery services and e-commerce.

Looking forward, we see opportunity in all sectors of the economy.

1. Financial services: We are seeing global consumer trends play out: challenger banks; insuretech; buy-now-pay-later; stock trading; payments; and cryptocurrencies. We are also seeing LatAm-specific needs and innovations: motorcycle financing for the gig economy; embedded credit; mobile wallets.

2. Consumer internet: We are seeing compelling opportunities take shape in all consumer categories (grocery; food; convenience; shopping; delivery; real estate; gaming), and we believe that e-commerce will flourish in a distinctly non-US way, with business models more resembling those in China.

3. Healthcare: We believe that both care coverage (insurance) and delivery (telemedicine) will be reshaped by technology.

4. Education: We believe the opportunity is enormous for technology to complement and complete LatAm’s current education system.

But the most interesting ideas are often unexpected, and we are always eager to listen.

What’s Next?

Having grown up in Silicon Valley in a family of entrepreneurs and engineers, I have personally witnessed the magic that happens when startup fervor takes grip over a community of smart, ambitious, hungry people, and success begins to compound. Today, there is something similar in the air in Latin America. The market opportunity is there, and the ecosystem is ready and galvanized.

We are not opening an office on the ground in Latin America just yet, but we do plan to visit every month or two in order to meet entrepreneurs. When we’re in town, we plan to host events that bring together the startup community.

We don’t plan to make too many investments. The Sequoia model is to invest in a small number of daring companies that dream big, so that we can throw our full weight behind the companies where we are on the board. But even though we aren’t rushing to make investments, we’re looking to the opportunity in LatAm with excitement and renewed optimism, from seed to IPO and beyond.

We at Sequoia have had the privilege of supporting the Silicon Valley ecosystem in its earliest days. We now see that opportunity in LatAm, and we look forward to doing our part to nurture a region that is starting to ignite.

If you are a founder and would like to meet, shoot us a note:
For Seed/Series A: Stephanie Zhan (zhan@sequoiacap.com)
For Series B and beyond: Sonya Huang (sonya@sequoiacap.com)
For Pre-IPO and Crossover: Bryce Kam (bkam@sequoiacap.com)

***

Thank you to David Vélez of Nubank, Simon Borrero and Sebastian Mejia of Rappi, and Fernando Spnola of Base Partners for their help with this article. We are also grateful for our long-term relationships with funds on the ground, including Base Partners, Kaszek, Monashees, ALLVP, Quona Capital, and Latitud, and we look forward to collaborating with these funds and others. Finally, we are grateful to the many founders who took the time to share their insights on the ecosystem with us, and we are enthusiastic about partnering in the years to come.

From idea to IPO and beyond, Sequoia helps the daring build legendary companies.

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