Investing in Latin America’s Volatility: Fintech, Motorcycles & Secondary Markets with Dave McClure | Nearshore Cafe

**Narrator:** Welcome to The Nearshore Cafe Podcast, home to the most interesting stories and people doing business in Latin America. Welcome, everyone, to another episode of The Nearshore Cafe Podcast. I’m Brian Sampson, your host. And first, I want to say a quick thank you to our sponsor, Plug Technologies. Plug provides software developers for growing US companies and operates all over Latin America. Very excited about our guest today. He is a legendary investor, founder, managing partner of PVC Practical Ventures, prior 500 Startups, early PayPal, and what we’ll talk about a lot today is also co-founder of 42 Geeks. Welcome, Dave McClure.

**Dave:** Brian, nice to nice to meet you. Yeah, absolutely.

**Brian:** So Dave, I had the chance to see a presentation of 42 Geeks at The Modernist in April, back in San Francisco.

**Dave:** Oh, right. Yeah.

**Brian:** But not everybody knows 42 Geeks. So can we first talk about who it is, what is 42 Geeks, and also the interesting story behind the name?

**Dave:** Yeah, well, so I guess in a way, it’s a reboot of something we used to call Geeks On A Plane, which I started way, way back, I think 2009 or ’10, with Christine Liu and some other folks. And then after I started 500 Startups, we did it pretty regularly for about six, seven years. We did two or three trips a year to different parts of the world. But the general idea is kind of, I call it nerd tourism. So it’s, we take a bunch of entrepreneurs and a bunch of investors. We go to different parts of the world, and we try and learn about the startup ecosystem, the venture investing ecosystem. We usually meet with other startups and entrepreneurs, and other investors and VCs, and occasionally governments, and probably a few corporate entities thrown in there. And we do some cultural events. We always end up doing a lot of eating, and probably a good bit of drinking as well.

**Brian:** Sure.

**Dave:** So it’s certainly a lot of fun. There’s some business that’s thrown in there, certainly a little bit of pleasure as well. But it’s mostly about people who are interested in exploring what the tech ecosystem looks like outside the US and other parts of the world. And like I said, we started doing that probably 12, 13 years ago. We took some time off, but Chuck called me up and was like, “Hey, we should really restart this again.” And we changed the name just because, you know, the other entity was so partially, I guess, 500-related. But about a year ago, we kind of rebooted that, and we’ve done three trips so far, about to do our fourth. We went to Southeast Asia last year, so we actually came here to Singapore and visited Vietnam and Thailand, and ended up in Bali. And then we did a trip to the Middle East earlier this year in February. We went to Israel, Palestine, UAE, and Saudi. Yeah, and then just a few months back, we went to Latin America, and we saw Uruguay, Brazil, and Sao Paulo. And then our next trip coming up, we’re going to be doing Taiwan, Korea, and Japan in October. So hope to do about three trips a year and visit different, both developed and developing, tech economies around the world. And people come with us, usually have a great time. A lot of it is just them meeting each other. So I sort of call it like summer camp for nerds on the road. But, you know, we take about, usually about seven to ten days, visit two or three countries, and there’s anywhere from 30 to 50 people. If you’re asking about the name, 42, that comes from Hitchhiker’s Guide to the Galaxy, right? For those who are not familiar with that, I won’t explain it. You should just read it. But, you know, 42 is the answer to the life, universe, and everything. Or also, what? Six times seven?

**Brian:** Well, we’ll make sure to put that in the show notes for everybody. And so on these trips, can you talk a little more about, you know, are you visiting companies all day, or what is the typical?

**Dave:** So usually, we try and anchor around a couple of events. So sometimes there’s other conferences going on that we’re joining. Sometimes we’re visiting like an accelerator setup or a larger platform company that’s key to the region. I think, like I said, there’s some government involvement. So when we were in Saudi, we got to meet with the Minister of Investment, which was pretty crazy. I mean, we actually thought we were going to meet with the Deputy Minister, but the minister himself ended up showing up. And I don’t think most people on our trip knew who he was, but it was the guy who was previously chairman of Saudi Aramco and was running basically the person setting global oil prices for two decades was the person who was sitting there talking to us, which was incredible.

**Brian:** Yeah, astonishing. This is maybe a trillion-dollar business too, right?

**Dave:** I think that was a bit of an outlier. I don’t expect we always get that kind of VIP to sit down with us, but that was amazing. Yeah, a lot, a lot of times we’re visiting companies in the region that have got to some level of success, anywhere, maybe 100 or a couple hundred people, and are already past maybe Series B or C and hopefully doing 50 to 100 million in revenue or more. And then we often meet with a bunch of startups who are looking to grow and get investment. And sometimes people in our group are writing checks. That isn’t the exclusive purpose of the trip. So it’s meeting with large and small startups. It’s meeting with investors, either other angels, other VCs, sometimes other corporates. And then also understanding what role government has to play in helping develop policy and investment frameworks. And also, we’ll do cultural events that are normal things that tourists do, just that we’re a little nerdier than the average tourist. Food is a big part of every trip, so we really, really love to eat. So we have a slogan which is kind of stealing from Marc Andreessen and Andreessen Horowitz, you know, “Software eats the world, but geeks eat everything,” is the sound bite there.

**Brian:** I like that.

**Dave:** So I always try and explore the food as well as the technology of the places we’re visiting. And we visit three or four, usually three or four cities along the way, a couple, couple days each city.

**Brian:** Yeah. Well, this podcast really hits into Latin America. And before we get into your 42 Geeks trip that you recently did, what was your experience with Latin America before all this? Maybe your first trip ever, and some of your other experiences?

**Dave:** Well, I’m trying to remember when the very first time that I went. I think in 2008 or ’09, I went with the State Department, the US State Department, on a trip to Colombia that was sponsored by some folks who were, it was a little bit of tech entrepreneurship innovation, but also a little bit of happening out of the US government. And I think at the time, Colombia was kind of starting to maybe settle down or stabilize with a lot of the things that happened with, there was an internal war. I don’t know, I wouldn’t necessarily call it a civil war, but there was like FARC gorillas and a lot of security-related issues. And that had just started to maybe calm down a little bit. So that trip was sponsored by folks in the US government who were bringing tech entrepreneurs to the region to see about how technology could help improve things going on in the country. And we visited both startups and governments, and also some non-profits who are doing education stuff. And that was my first real experience in seeing Latin America, aside from some other stuff I had done when I was in college. And it was pretty interesting to see both sides of stuff. We were in Bogotá, and I think Medellín. And then we also had a trip into the middle of the jungle, which was kind of pretty intense. I mean, we visited some small villages there that I think were, I think the government was doing some kind of PC, I can’t remember the name of that program, but they were giving PCs to kids in schools down there. But we were literally on a military cargo plane with a general, and we landed in like this place where there, you know, there were tanks around. We were in camp, we were surrounded by people who were in camo, and it was like right in the middle of…

**Brian:** Oh my God, that was like, you know, really that’s pretty intense.

**Dave:** Wild.

**Brian:** Yeah, first experience.

**Dave:** Yeah, subsequent to that, when after I started 500 Startups in 2010, I had some friends who were investing in Mexico. And David Weekley, who’s a founder of another company called PB Wiki, I think. And then two local Mexican tech nerds, one who was a developer, one who was a designer. And they’d been running kind of a startup house type of event, kind of Hacker House event. And so David was getting a small VC fund started down there with those guys and I think his wife or partner at the time also. And we were small investors. I think they were aiming to put together like a two or three million dollar fund to invest in tech startups. And a lot of these guys were very involved in the startup developer community in Mexico City and also, I think, Guadalajara, Monterrey also. So the fund ended up being a lot smaller than that, and we ended up being probably half of that fund. And then about a year after that, we kind of just decided, “Hey, we should just join forces.” And so those guys ended up becoming the Latin America team for 500 Startups. And Cesar and Santiago, Santiago now is still running 500 Mexico, or 500 Latin, I think. And they’ve done really great. I think they’re raising their third or fourth fund. I think they’ve invested in two or three hundred, at least two or three hundred companies down there, and really all over the region. So that was kind of the beginning of a more regular involvement there. There was another woman, Veggie Yang, who is also managing partner 500 Startups, who was a Brazilian native, and she had joined us. And we were also doing some investments down in Brazil. I think this was kind of in the 2011-12 timeframe. Both of those things started happening. So we had a pretty significant exposure to Latin America through those two countries and then through the rest of the region as well. And it was really, really clear to me that there was a big market opportunity. You know, just in those two countries alone, you’re talking 300 million people. The rest of the region is probably another two or three hundred million people. At the time, there was very little US investments in tech companies in Latin America. I mean, there was starting to be some attention from US VCs in Brazil in a few places and Mexico selectively. But it was still pretty undercapitalized, both domestically and certainly from a US perspective. So we kind of, even though we had a small budget for the market, we were pretty active investors. Even the first year or two, I think the Mexican VC and later 500 Mexico team was doing 50 to 100 investments per year, mostly pre-seed and seed. Veggie was doing probably 10 to 15 investments per year in Brazil. And then we did other investments in other regions. So we were one of the very few US-based investors who was active in the Latin American startup scene, which didn’t take much, really. If you were even there writing any number of checks, you were among the people who were doing it. But I think for us, because we had people on the ground who were both from Brazil and Mexico, we had a little bit more visibility into what was going on. And there were probably five to ten, maybe even less, active VCs in both countries. I think probably less than that, really. These days, there’s a lot more. But still, I would say Latin America is still relatively undercapitalized compared to the opportunity. And I’m sort of glossing over 10 years of growth where SoftBank had a major presence and then not so much of a major presence. And so there’s been an acceleration of activity in Latin America that started happening in 2017, ’18, ’19, and then kind of a pullback after that, which has been a little unfortunate. But still, huge opportunities. A bunch of companies that have gone public, which is sort of like eBay for Latin America, is a $70 billion market cap company. DLocal, which was an IPO that’s out of Uruguay and payments, that’s had some pretty strong success. And a few others on the way, I think Nubank and some others, you know, have some ups and downs. But still, fintech and e-commerce have been sort of the two big pillars of the Latin America startup scene over the last 10 years. So that’s a whole bunch of stuff, and I probably skipped a lot there, but we can dive into any of that if you want.

**Brian:** Well, I wanted to first ask just about the checks in proportion. So, for example, it’s so much more expensive in California. You know, higher and, yeah, and a big percentage of that, you know, it goes for talent, right? Any any software.

**Dave:** Yeah, unfortunately, that goes for like rent and everything else too.

**Brian:** Yeah, so it’s not sure to hire people or to, you know, pay the rents. And well, I guess, yeah, real estate are a lot cheaper in Latin America, so the check sizes are obviously smaller.

**Dave:** Yeah, they’re smaller, but they go a lot, a lot further.

**Brian:** Yeah, yeah.

**Dave:** We were doing probably, I think, I would let’s say in the US, we were probably doing $100,000 average size checks, maybe a little smaller, larger. In Mexico, we’re probably doing more like $25,000 to $35,000 average checks. But you might actually get more out of a $25k check in Mexico than a $100k check in the US.

**Brian:** Yeah. Do you think about like milestones that these startups are trying to achieve? Do you think that that got you more bang for the buck? Like more, more?

**Dave:** Certainly. I mean, I think, you know, in the US, you might look at a pre-seed round at, you know, $250k to even up to a million. In Mexico or Brazil, maybe Brazil is probably a little bit more expensive. But still, I would say, you know, a lot of people were doing $50,000 to $100,000, you know, sort of checks. But there wasn’t as much of an established market. So a lot of times it was just either individual angels or a very small number of funds that were deploying capital. This was 10 years ago now. I think that’s changed, but it’s still relatively inexpensive. I think Mexico City is now becoming a lot more expensive. So it kind of depends on where in Mexico City you’re operating a startup. You can certainly spend a lot of money if you want to live in the “shi-shi” sections of town. But, you know, there’s probably some parts of town that are more less expensive. In Brazil, kind of same thing. There’s certainly very expensive parts of Rio and Sao Paulo if you want to be there. There’s very inexpensive parts of those towns as well. So there’s kind of the highs and lows of all that.

**Brian:** Yeah. And Dave, if you wouldn’t mind, let’s dive into just your personal experiences on this last trip to Latin America. So maybe start with Sao Paulo. That was your first stop, right?

**Dave:** Yeah. And it was the first time I’ve been back down to Brazil for a while. I used to go to Brazil kind of frequently, at least maybe once a year, sometimes more than that, but I hadn’t been down for probably six, seven years. Yeah, Sao Paulo is obviously one of the largest cities on the planet. I think probably 25, 30 million people in the overall extended metro area. So huge, huge economy. And you know, it’s a very vibrant city, amazing people, tremendous food.

**Brian:** Any anything particular cuisine, food that you remember?

**Dave:** Yeah, we were in Argentina, Uruguay, and Brazil. So I had a lot of meat for about 10 days straight. I had far more beef than I could possibly even think about eating. But you also get a lot of fresh fruits and vegetables. I mean, you’re sort of in the jungle, even though you’re in a major urban city, you’re effectively in the jungle, and so you get a lot of tropical cuisine and food, which is great. I like meat too, so that was awesome. And, you know, a fair amount of seafood as well, since you’re on the coast, so that was terrific. Again, you can choose to pay whatever you want, and you can spend a lot of money or not a lot of money on dinner and food there. But yeah, and I think, you know, maybe not that everything’s rainbows and unicorns, there’s probably some security and crime issues you need to be aware of, and that’s certainly true in Argentina as well. But still, it’s an amazing and growing economy, and I think the people are incredibly social. And that’s not just a qualitative statement, that’s actually a measurable, quantitative statement when you’re talking about social media. And so just, you know, there’s a lot of sharing of experience that is both the interpersonal side and then also in the social media world. I think there’s some measures of Latin America and specifically, you know, South America social media being the most active users on the planet, maybe competing with the folks in Indonesia and Southeast Asia and maybe in the Middle East as well. So it’s a lot of everything, I guess I would say. But, you, know, for me, it was the first time I’d seen it again since now having been down there for probably seven years. And a lot of things have not changed, but then a whole bunch of other stuff has taken off. Particularly in Brazil, there’s a payment system called Pix, which I don’t know if people are aware of, but just kind of started less than two years ago, I think, maybe a year, year and a half ago. And half the people in the country are using it. Like, I’m not exaggerating. The adoption is crazy. Penetration is insane.

**Brian:** Wow!

**Dave:** I think it was north of 40% in about a year. And so that was super crazy. Like we didn’t even know about that going down, and then we were talking to people.

**Brian:** Yeah. What are you, what are you talking about? And do you think there’s any lessons to be gleaned from their go-to-market strategy or anything?

**Dave:** I don’t know exactly the whole story there, so I’m probably not the best person to tell this tale. It was a somewhat government-sponsored effort, and there was significant involvement with the banks. So I think that had a lot to do with it being widely available. I don’t think there’s a lot of costs associated with it, so it’s maybe somewhat subsidized. But it has resulted in a huge amount of payments activity. You know, there’s maybe a similar effect to some extent that’s happened in India with the way that they’ve done their, I can’t remember the name of the national identity system there. And then, strangely, I think, I’m trying to remember, but I think Turkey maybe 10 years ago had worked with a bunch of local banks to help get e-commerce payments off the ground there. But it’s just really a pretty amazing change when you see that much behavioral adoption in such a short period of time. And you don’t normally think about Brazil as being this huge, technology-advanced outlier, but in that area, they seem to have had quite a bit of success. So that’s not throughout the rest of Latin America. That’s just in Brazil right now. But I know other people are trying to figure out how to copy that success story.

**Brian:** Yeah. And I was going to ask you just your personal thoughts on, you know, business aside, maybe just Brazil versus Uruguay versus Argentina. You know, how might you describe them?

**Dave:** Yeah. So a very interesting thing was, you know, when I’d been down to Argentina, I’d been to Buenos Aires, I think, twice before. And certainly, we’ve done a lot of deals with people in Argentina. You know, Argentina is a bit of a basket case, economically speaking, but there’s a huge amount of talent down there, a lot of software developers and designers. And, you know, there used to be this story about Latin American, South American companies where they’re incorporated in Chile, they were started by Argentine developers, but really the market was Brazil. And I think that’s maybe still true. There’s certainly a lot of Argentinians who develop for the Brazilian market. But the other interesting thing was that was the first time I’d been to Uruguay in Montevideo. A bunch of people that I had known who were investors in Argentina had moved to Uruguay. And particularly the VCs, and they were still doing investments or running businesses in Argentina, but a lot of people had…

**Brian:** Yeah, Switzerland of Latin America, like the bank.

**Dave:** Yeah, or the Singapore or the Dubai, if you want to use those analogies. So I guess for whatever reason, the government of Uruguay is run by, how do I put this delicately? Sane people who are reliable. And, you know, I probably shouldn’t be talking about Argentina, but I don’t think I’m the first person to say Argentina, I think, we’ve had some challenges.

**Brian:** Yeah, we’ve got plenty of Argentines on the show who would say the same thing.

**Dave:** Yeah, yeah. It’s like, I was just watching a YouTube video on Argentine inflation this morning. And, you know, while we were down there, it became a topic because I think inflation’s running at 110, 120%.

**Brian:** Yeah. But this is not news. I mean, it’s been like out of control inflation for 20, 30 years.

**Dave:** Yeah. The country’s defaulted on its currency or whatever on bonds more than 10 times.

**Brian:** Yeah. Yeah, I’m sure you, I’m sure you went to some restaurants where the prices were written in chalk.

**Dave:** Well, yeah, like there’s places where they talk about raising the prices during the afternoon to keep up with changing again.

**Brian:** Yeah, it’s not an exaggeration. That’s just like, yeah, yeah, that’s true.

**Dave:** Yeah. So it was, it was interesting to see that like Uruguay had picked up this opportunity to sort of be a little bit more manageable economic situation, you know, situated kind of between Brazil and Argentina, which are these two huge populations and economies. Uruguay, I think, is maybe only eight, ten million people. I’m not quite sure. And but relatively stable and well-run government and a lot of forward-thinking economic policy is again, similar to like how you see Singapore and the UAE in their regions. So that was kind of interesting. And the place where we also visited in Uruguay, I think, was about an hour or two drive from Montevideo. It’s called Punta del Este, and a lot of people hang out there. I guess it’s a really popular destination during the summer, which is in the wintertime for the US. But we visited a startup house there that was inhabited by, you know, startup developers nine months of the year, and then they rented out to tourists for three months of the year and pay for the rest of the year out of that, which is, which is a great story, I guess, except for the three months where you’re maybe living elsewhere. So that was interesting to just see those folks, you know, how they were sort of managing some of the challenges in the economic environment. We had dinner with some folks. I won’t name drop, but some very VIP folks in both the Sao Paulo and Uruguay who were quite, quite involved with a couple of VC firms and with Mercado Libre. So we got to hear a little bit of the inside story of both of that. It was really interesting looking at both the opportunity and the challenges in those environments. And I think that’s an ongoing issue for anybody investing down there is tremendous opportunity, but some tremendous economic challenges and volatility and political issues to be aware of.

**Brian:** [Music]