Latin America, marketplaces, Startups

Launching a Hypothesis-Driven Startup

There’s nothing like the second year of an MBA program. Although I’m taking a full 15 credit course load, I had a ton of leeway in choosing my schedule and decided to stack all my classes on Mondays and Tuesdays. With a “5-day weekend”, I plan to dedicate quite a bit of time in honing a business idea my Dad and I have been tinkering with.

As a quick recap, I learned to code this summer and for my final project I built a prototype of an online marketplace. It’s by no means a finished product, but it is a product that I can demo to prospective customers. With my 5-day weekend, I decided to fly down to Panama – the initial target market – where I attended a tradeshow. In just a few days, I’ve gained a lot of insight into both the market and the customer.

Panama is a strategically located and business friendly country, making it an ideal market to launch a Latam startup.
Panama is a strategically located and business friendly country, making it an ideal market to launch a Latam startup.

There are a lot of ways to define a startup, but the best definition I’ve found is the one proposed by entrepreneurship guru Steve Blank: “A startup is an organization formed to search for a repeatable and scalable business model.” In essence, a startup is a set of well-formulated – and therefore testable – hypotheses that the entrepreneur must either validate or debunk. With every customer insight, the entrepreneur then tweaks the business model to reflect and ultimately solve the real needs of the market. It’s an iterative process, but constantly adjusting to arrive at product-market fit is how you build a scalable business without investing huge amounts of capital upfront.

During the few days here, I spoke with a lot of people in the “vertical” my Dad and I are targeting. Three interviews with domain experts where incredibly insightful. I had a set of 10 questions that I felt would lead to a lot of insight. Although I never went through all 10, I was able to touch upon key elements that will help refine the marketplace going forward. In particular, I gained deep insight into the following:

Customer discovery: buying and selling in this market is prohibitively expensive and incredibly inefficient. I now have estimates of how much it costs to the prospective seller using the current solutions, and even how much it costs – in time and money – when a sale is unsuccessful.

The customer development cycle espoused by Steve Blank.
The customer development cycle espoused by Steve Blank.

Market size and market dynamic: talking with several experts, I was able to triangulate an estimate of how many potential customers exist and what the total gross merchandise value of the marketplace could be. I also learned much more about what drives sales cycle and sales channels in this industry. Most importantly, even though this is a relatively small market, I believe there are enough players to create initial liquidity in the marketplace.

Competitive landscape: I was able to piece together a pretty comprehensive map of online players and their limited solutions, as well as more traditional brokers and dealers. There are a lot of relatively small players, which leads me to believe that the supply side of the market is very fragmented. A verticalized marketplace could very well add a lot of value, not just by reducing search costs but also my reducing transaction costs.

I also learned that a key challenge of building this business in Panama will be changing the mindset of potential customers that transacting online is a viable and much better option than existing solutions. Nonetheless, the heat and vibrancy throughout Panama was intoxicating, and I am convinced that this is an optimal market to launch a Latin American startup.

Fintech, Latin America, Startups

Latam Startup Series: Nubank

I have been captivated by the idea that businesses infused with technology at their core and espousing a culture of continuous learning can unleash Latin America’s productivity and true potential. The aim of my Latam Startup Series is to identify those companies in the region that are radically changing the competitive landscape of their respective industries by introducing fresh perspectives and new solutions to pressing problems. My ultimate hope is that by highlighting some of these innovative companies, we can break down the no se puede (“it can’t be done”) mindset so prevalent in Latin America – to me, the biggest roadblock to generating a cycle of positive change in the region.

Over the last three weeks, I went through the unfortunate experience of closing my bank accounts in Costa Rica (where I previously lived/worked for two years). Yes, you read that correctly – it took me three weeks to close my accounts. Bottlenecks included locked accounts (so I couldn’t pay off my credit card), filling out multiple forms (some could be handwritten, some needed to be typed), unanswered emails, dropped calls, more forms, more unanswered emails…you get the point.

This isn’t an isolated event: I had a similar experience with a different bank from another Latin American country last year. From a customer perspective, banks seriously suck in Latin America (including the multinational ones). They are incredibly bureaucratic built on top of legacy infrastructure that is slow and barely secure. Yet, despite their terrible services, they make tons of money.

That’s why I am excited about Nubank, a relatively new Brazilian financial services company. What’s unique about Nubank is that the company is completely digital – in other words, no physical bank branches. This translates into a significantly lower cost structure, thus allowing the company to provide customers with better services at much more competitive prices. Nubank currently offers a Platinum MasterCard credit card that customers can manage through an intuitive iPhone or Android app. With more than 200,000 people applying for the digital credit card, this Latam startup seems to be on a path to huge success.

brazil flag

Brazil, of course, has unique dynamics that make Nubank a compelling investment. First, Brazil is a huge market: the country boasts a population of 200M. Second, Internet penetration is abnormally high due to the +90M smartphones currently in use. Third, Brazil has really high interests rates: the benchmark (Selic) rate is about 14% compared to ~3% in Mexico and ~5% in Colombia. Lastly, despite a tepid macroeconomy, credit card transactions have been on a tear, growing over 13% from 2013 to 2014.

Add to this market opportunity a capable and visionary leader – founder and CEO David Velez – and it’s no wonder that Nubank represents Sequoia Capital‘s first venture investment in Latin America. In fact, Nubank raised a $30M Series B a few months ago to take on Brazil’s biggest banks.

While trying to find investment opportunities on behalf of Sequoia, David Velez decided to roll-up his sleeves and build the opportunities himself. A badass.
While trying to find investment opportunities on behalf of Sequoia, David Velez decided to roll-up his sleeves and build the opportunities himself. A badass.

Although replicating what Nubank is doing in other Latin American countries would be challenging due to different regulatory hurdles and market dynamics, I think Velez’s calculating approach – identifying and then tackling a broken industry by building a tech-savvy business – provides a powerful roadmap for other Latin American entrepreneurs.