Trump, Trust, and Turning a Profit
Trust is everything — or almost everything. What my startup learned about timing, trust and luck from Mexico’s post-election currency crisis
CNN is blasting across my apartment as I’m skyping with our CFO. My cellphone is on hold with our bank executive on the other side, and I´m on the landline with my co-founder. All while I proof read the routing number of the wire we are about to send. It would all be business as usual, except for the fact that the world is about to change. It’s Tuesday, November 8, 2016, and it’s Election Day.
It’s been almost two years since the company I co-founded, CrediLikeMe, entered Village Capital’s venture development program in Mexico (more on my experience here). Since then, we have had a lot of challenges that tested our limits, and ultimately built us to be a better company. You know; no pain no gain. Our team has issued tens of thousands of loans to Mexicans whom otherwise be underserved. We have created more than forty direct jobs and dozens of indirect jobs. We have developed technology, a culture, and a brand.
All of this would have not been possible without the trust that our investors, customers, and employees have deposited upon us. We are extremely grateful to them.
Trust is the real currency of a business. Trust is the real currency of any relationship, be it a romantic one, a political one, or any kind. Trust is what makes the world work. Without it we wouldn’t get on planes — whose operation most of us can’t explain — and we wouldn’t be able to open bank accounts, let alone participate in international financial systems. Without trust the world becomes expensive, slow, and full of friction. Trust enables, empowers, and makes things go faster. As Stephen M.R. Covey says, “Business moves at the speed of trust”.
Fiat currencies also rely on trust. Ever since the Bretton Woods Act, the world has sprung out of the gold pattern into a trust-based monetary system. We trust that the issuing government will pay back the value of the bills and coins it prints and mints. The stronger the economy, the more likely the government will pay back its debts. So all countries are striving to increase their perception of trust, in what becomes a war between central banks. This war is fought via the media, on FX markets that are running ultra-high speed algorithms, and through politicians creating either trust or fear. It seems like a game, and for some countries, a zero-sum game.
This is where Mr. Trump comes into the picture. Throughout his campaign, Donald Trump created an atmosphere of mistrust towards the economy of Mexico. He influenced the markets by pressuring Ford to withdraw plans to build a new plant in Mexico, threatening to re-negotiate NAFTA (without being clear on what he will try to change), and saying he will make Mexico pay to build a wall. As a result, the Mexican peso has depreciated a whopping 56% against the US dollar in 18-month period. That was the same period that we negotiated a debt deal — in US Dollars — from Village Capital.
Mexico has a relatively-stable economy, with a strong financial system, and an exciting internal economy that was proven to withstand the 2008 world financial crisis. So, it was hard to imagine that the Mexican Peso was going to depreciate from 14.2 MXN / 1 USD (when we finished the Village Capital program) down to 22.1 MXN / 1 USD (as I write this sentence). And it was even harder to imagine that Mr. Donald J. Trump would run, win, and become the 45th President of the United States, unless — of course — you are a staff writer for The Simpsons.
That November 8, all bets were off. As the day unfolded, we decided to prepay the debt that was originally programmed to be paid back in four years. The annual rate of 14%, plus a whopping 56% FX depreciation of the Mexican Peso, was killing us. We had not mitigated the risk. And the prospect of Donald J. Trump* winning was getting real. I remember that at noon, the markets were bullish on Clinton winning. This influenced the price of the US Dollar and we made a run for it. The FX currency was at 19.3 MXN / 1 USD when we paid back. A couple of hours later, it was over. Trump won, Clinton receded, and the US dollar spiked to 21 MXN for 1 USD. To put this on perspective, by paying that day instead of the next one, we saved enough for a month of customer service salaries, and a couple of Facebook ads.
So what lessons can be learned? We acquired a debt deal that gave our company enough runway to get to our Series A. Without that cash-flow — without Village Capital trust — maybe our company would have lost traction and the investment of another strategic investor wouldn’t have materialized. It was an extremely helpful deal that made the difference between closing down, or continuing to grow. But we didn’t hedge, and that was a mistake that could have been prevented.
We should have recognized the risk of currency fluctuation. But, we were overconfident on the macroeconomic context, and in our ability to payback. So, we didn’t. In hindsight, Village Capital shouldn’t have lent us the money without the proper mitigation. And we should not have taken the debt without hedging against currency depreciation. But all that is easier said than done. When we were at that period it just felt that it was something we didn’t need. We trusted the MX Peso strength, until we couldn’t.
Trust is everything to us. We are a lending company, and as such we trust our customers that they will pay us back. Our customers trust us on providing them with a quality service. Our employees trust us on paying their salaries and taking care of them. Our investors trust on our skills to turn a profit. And we — as entrepreneurs — trust ourselves on finding ways out of trouble. We trust we will find a way.
The world needs trust more than ever. We need to trust that our shared interest for welfare exceeds our differences. The world yearns for trust mechanisms that enable migration, fair trade, and security. We as entrepreneurs can build trust — it’s our job and our magic. By doing so, we can change the world. I believe Village Capital stands for change. And by empowering entrepreneurs in health, finance, agri-tech, and education, Village Capital creates trust: trust in the entrepreneurs, the business, and the countries it works. However, we all need to learn to mitigate the risks that will come with change.
President Obama said in his farewell speech that we need to trust in our ability to change. He is right, and I humbly add; trust in your ability to change, and embrace the risks that come with change. Do mitigate. Do hedge. Do study. Do work hard. Don’t just rely on trusting your instincts and the current situation. Act to prevent for the worst. Because you never know when The Simpsons might be right.
Armando Kuroda is the Founder of Confianza Digital, and the peer-selected winner of the 2015 Fintech Mexico Village Capital program. @armandokuroda
*I like the guy. I think he is a master salesman, and we can all learn something from him. And believe me, It can be worst… ¡Hola Peña Nieto! ¿Salvando a México o que hace?
