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

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

**Host:** Yeah, and I’d like to hit on that a little bit more and get your perspective. For me, personally, I found… you know, I lived in Argentina for a little over a year and building a company there, the perseverance and the grit, 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 at 100% inflation. I just, yeah, I have no idea where you begin with that. Like, we couldn’t purchase laptops on credit; everything was in cash. It was, I mean, just, although I wouldn’t say the inflation, the government mismanagement. And for them, it’s just a Tuesday, right? Like, any one of those things would drive us crazy. So, as we were talking about just some of the external challenges that these people have, they’ve not caused any of it; they’re just experiencing it. What does that make you think about as an investor when you have to deal with the external as well, because that’s part of the equation? But maybe that, does that make founders more interesting because they’ve had to develop much more grit?

**David:** Yeah, the rose-colored brush, or whatever out of this. I’m probably mixing my metaphors here. I think you have to be aware that, 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 five to ten years. And we’re still seeing it where you have government switching parties. You have, certainly, a challenging relationship with the US 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, or yeah, so it’s just, you know, and a lot of populist-related issues. I’m sorry, I’m forgetting the Mexican leader’s name or abbreviation. Is it AMLO, I guess? Or is that the… 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 fire extremes on that, maybe Venezuela, Bolivia, and others. But even in sort of moderate countries, there’s pretty significant populist stories. You know, in Argentina, Peronism, and now maybe Kirchnerism. It’s weird. You know, in Brazil, Bolsonaro, who’s sort of like a Trump-like figure. So, 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 I will not tell you who mentioned this quote to me sometime, because I thought it made me jerk my head back when I heard it, but somebody who was an investor in Latin America said to me one time, “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 my investment thesis.” But the way that was stated was, 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 there is something to be said for sort of looking at, okay, in a challenging economic environment like Argentina, somebody’s probably trying to solve problems. And I think if you look at the overall… The thing that was really clear, and this was true 10 years ago and is now true today, is more than half of startups and venture investing in Latin America is fintech. It’s like half fintech, or two-thirds fintech, and one-third e-commerce, and then very little everything else. I guess now 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, although the 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 the most, which is puzzling when you look at homeownership rates in the U.S. or North America, and even Europe, you’re further along. So, 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 people’s average GDP is probably $10,000 U.S. equivalent, or even more certainly for some part of the population, 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, like 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 even really basic stuff. For example, 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 the logistics for like DoorDash equivalent businesses down there. That company is growing huge, like, really taking off. I think they just raised a new round, I believe, from QED and Bicycle. Bicycle is the new VC fund that was started by Marcelo Claure, who was previously SoftBank Latin. And two months later, we decided to jump in and put some money into that through a combination of primary and secondary. And if you asked me four months ago, “Hey, you’re going to be investing in a motorcycle company in Brazil,” I’m like, “What are you talking about?” But the 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 Sao Paulo. And they can’t make the motorcycles fast enough to keep up with the opportunity there. So, if you have a motorcycle to do delivery, you can double your salary in Sao Paulo. And a lot of people can’t afford to buy motorcycles, so they’ll pay for it on a leasing basis. And for them, it’s really like a functional business loan to get off the ground and start 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, you know, renting motorcycles, is that a tech company? But it 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… one part of the house was these guys working on and fixing the motorcycles and building the motorcycles. Like, I thought I was in the shop, a shop, shop for a motorcycle shop. And then the other side of the house looked like a call center, and they had this open floor of people on headsets and lining up people for delivery. And I was like, “Wow, this is a pretty cool combination of sort of like high-tech and low-tech 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, really interesting opportunity. And I think again, you’re seeing that all over Latin America are 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 of some of the same issues we were just talking about. So, it’s nowhere near like what you see in the U.S. 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.

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

**David:** 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 of 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 five to ten percent 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 four to six times revenue, which is unheard of here in the U.S. You’re going to pay two or three times that for fast-growing opportunities in the U.S. So, that’s super interesting that you can get in on the ground floor and some stuff that isn’t crazy expensive. On the flip side, liquidity is 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 some recent IPOs and a lot more in the wings, the ones that I mentioned before—Mercado Libre, Way back, DLocal, and NuBank, and others more recently—are still kind of few and far between. So, I don’t think you should jump into the Latin American market expecting that you have a short path to an IPO or a very high probability path to an IPO. 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 are incredible growth opportunities, and hopefully the liquidity story gets better over the next decade. I think you are seeing more non-U.S., 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 agriculture and potentially for oil as well. So, I do feel like if you’re playing a 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, who have some long-term connections to the markets down there.

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

**David:** Yeah, yeah. So, for folks who are not aware what we do, we’re a secondary market investor. We buy positions in companies, which we call “direct secondary,” or buying out other shareholders in companies, or sometimes founders and employees. And then at the fund level, which is a little bit more of 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. Because 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 not necessarily willing to wait 10 to 15 years for their returns and might be looking for liquidity and more of a five to seven year horizon. And so we will 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. Or for those folks, it 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 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, it was like, “Wow, there’s some really great companies that are going to have still another three to five 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, window. If we’re willing to be a little bit patient for another three to five years, we can see some great opportunities, assuming we’re managing the risks of getting to liquidity, which are still there for anybody jumping in, and all the things we just discussed before about currency risk and political volatility issues. But I think because we’re 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.

**Host:** Yeah, yeah. David, I’ve got a couple of fun questions here as we start to wind down.

**David:** Sure.

**Host:** In your three-country trip to Latin America, I know you ate a lot of red meat. Was there… I had to get back on the gym after that.

**David:** Yeah, me too. All I wanted to do was eat vegetables after my time there. I did, I needed a vacation for meat when I came back from down south. I was like, “Anybody got any spinach? I could go for that.” But although, again, there was a lot of fresh fruit there too.

**Host:** Yeah, yeah. But I was curious if there’s any one particular meal that stood out in your time there?

**David:** There were several. And I’m trying to remember, there was one restaurant in Sao 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, 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. It 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, Hernan. But yeah, it was just, I think for a lot of folks who’ve had South American cuisine before, it’s a lot of comfort food.

**Host:** Yeah, yeah.

**David:** So, it kind of tastes amazing, but you do have to sort of watch your carbs and blood pressure.

**Host:** Yeah, a little bit.

**David:** Yeah, if you’re paleo, you can do okay. Just meat and fruit. But those empanadas are pretty good too. I think probably the most memorable experience with me was, I’m not a Spanish speaker, but I managed to download and order door delivery and pay in another currency. It took me a while to figure out what I was doing. I had to like, 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. So yeah, there’s just so much opportunity to go after down there. I think, really again, it’s overlooked by U.S. 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, you know, huge growth and a vibrant city, and a multicultural, multi-ethnic city. And so I really encourage people to 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 are 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. And I do think there are interesting, sort of digital nomad communities spread across different parts of Central and South America to check out as well.

**Host:** Yeah, yeah. Last question for you, Dave. As you picked up a little bit of Spanish, you made your delivery order. Was there any, do you have any favorite Spanish words or phrases that you picked up?

**David:** 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, actually, more just understanding of other languages. So, “hola” is my only really… “Hola, gracias” was about 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.

**Host:** Good. Maybe Google Translate and some future Babelfish will help me get there faster. Awesome. ChatGPT for Spanish, whatever you go. 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 a pleasure to have you on.

**David:** Yeah, a lot of fun. Good. I want to encourage folks who haven’t visited to check out and go see it yourself.

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

**David:** And if any of your listeners are interested, we’re planning to do 42 Geeks 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 North Africa, probably Morocco.

**Host:** Oh, interesting.

**David:** 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 visit… it’s interesting folks there. 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 hanging out with startups, investors, and eating a lot of great food.

**Host:** Love it. And it makes a great trip. And that’s 42geeks.com is the website, right?

**David:** You bet. Yeah, you bet. Just the amount that you can fit on a bus.

**Host:** Well, Dave, thanks again. Let me thank our sponsor real quick: that’s Plug Technologies, a great way to find software developers all over Latin America for U.S. companies. We’ll see you next time in The Nearshore Cafe. Thanks again, everybody.