Episode 19: Reinvesting in the Latam Tech Ecosystem with Brian Requarth

Brian Requarth is the Co-Founder of Latitud and former CEO of Viva Real. Through Latitud, he now dedicates his time to providing mentorship and advice for entrepreneurs in Latin America (LATAM).

Brian’s new book, Viva the Entrepreneur: Founding, Scaling, and Raising Venture Capital in Latin America shares the hard lessons he learned while building and scaling his company. It covers best practices for communicating with your co-founder, finding great investors, and building a good board. Brian joins me this week to share how he’s investing his resources back to LATAM, and lessons for marketplace businesses.

 

Social Capital

Brian’s work is part of a greater initiative to connect founders in LATAM with high level founders, advisors, and investors. His goal is to elevate the Latin American startup community by providing access to global mentors.

Investors are beginning to realize the massive potential for fast growing companies. Companies from emerging markets have the advantage of having large markets with fewer competition.

Latitud helps founders in Latin America leverage the collective knowledge and wisdom from global mentors. The rigorous program is a month packed with insightful talks and one-on-one sessions. This social capital model provides value and inspires founders to execute their vision.

Focus on owning one market

When building a marketplace, you should focus on being a big fish in a medium-sized pond. Founders often make the mistake of scaling globally too early and wasting resources.

“Matching supply and demand is critical.”

Chasing the international market is a distraction. Marketplaces should focus on dominating localities first, then branching outward. Start in one specific area then expand to neighbouring ones, which allows companies to focus on rapidly improving their service/product as feedback is implemented quicker.

Build a strong inner circle

Being a founder can often feel lonely. This is especially true for first-time founders who have not yet seen success. Brian highlights the importance of creating a trusted network and emphasizes two key takeaways to keep you on the right track:

  1. Find other founders who are ahead of you in their journey. Fellow founders are better able to empathize with the struggles of raising capital, leading a team, and hiring/firing.
  1. Have a good executive team. They will rise above challenges during crisis moments, carry your vision, and come up with unique solutions to problems. 

“Find a trusted network.”

Persistence

Brian reminds us that during challenging times, a founder must focus on the things they can control and resist distractions beyond their control. When driven by a mission rather than money, they are more persistent in the face of adversity.

“It’s about persistence and focus.”

Viva Entrepreneur is full of insights and lessons from someone who has walked the talk. Brian is honest and transparent. I recommend this book to anyone looking to learn what it takes to build a great company.

You can also invest in Brian’s rolling fund at: http://fund.latitud.com/


If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

FJ Labs Valuation Matrix

A while back I posted the matrix FJ Labs uses to evaluate marketplace startups. It has been our default internal framework for years but is limited to marketplaces with a 10-20% take rate, which used to be our bread and butter. However, now we mostly invest in B2B marketplaces, which typically have 3-5% take rates. The framework is also not applicable for SAAS businesses and ecommerce businesses.

In addition, it was not clear enough whom you should raise from and what the expectation was for the proceeds of the raise. Investors and VCs typically specialize by stage and you need to be speaking to the right VC for the right stage. As result, I redid the matrix to be clearer and cover most cases.

To address expected traction at each stage, I switched from using Gross Merchandise Volume (GMV), as the metric of reference, to net revenues. This allows us to make traction comparable across different business models, even though some differences persist as most SAAS businesses have 90%+ margins, while most marketplaces have 60-70% margins and ecommerce margins vary.

Note that there is also an implied growth expectation that you will move from stage to stage in around 18 months.

Note that the ranges above cover the median. There are many exceptions, especially on the higher end. In other words, the standard deviation is rather high. A second time successful founder can raise at a much higher valuation. A company growing much quicker than the average can often “skip a stage” and have its Series A look like a Series B or its Series B look like a Series C. However, these are general guidelines that should be helpful for most entrepreneurs.

For reference, I am also attaching the original FJ Labs Marketplace Matrix.

Episode 18: Thirty-Six Lessons from Company Founders & CEOs with Tim Jackson

Tim Jackson is a fellow entrepreneur, venture capitalist and author. He has lived an interesting life from a career in journalism for the Financial Times, to VC seed funding for technology startups. It was no accident that he would eventually find himself in this world – he recalls speaking on the phone and writing a column about some guy called Jeff, who had just started a company called Amazon in 1995.

Tim fell in love with VC as a managing director running a $700m fund for The Carlyle Group in Europe:

“I realized that actually my heart is with the struggling entrepreneur, who’s got a fantastic business that isn’t yet quite right.”

His new book, Startup: Thirty-Six Lessons from Company Founders & CEOs, will teach you how to make better decisions and become a more competent CEO. Tim knows firsthand how frustrating it is to navigate the seas of heading a company with no guidance. He joined me this week to share some of his knowledge and insights with us.

Walk

There are two driving philosophies behind Tim’s emphasis on ‘walking’ when it comes to startups.

  1. Taking walks around Kensington Gardens and Hyde Park with potential entrepreneurs led to having conversations that were much more agreeable, personal, and revealing. Knowing the type of person a founder is goes a long way.

“I had underweighted founder skills and temperament as a factor in our investment decision making. I thought it would be a good idea to move the process of due diligence to the top of the funnel stage and actually meet entrepreneurs and learn about their life stories (instead) of hearing their pitches.”

  1. Building a startup is not a sprint. In fact, it is not even a marathon – it’s more like walking. Think about the totality of the slow yet consistent steps taken over the course of one’s life. Tim warns against the common trap VCs fall into: being overly hasty and setting unrealistic timescales.

“It’s a bit like that line of Peter Thiel: people overestimate what they can achieve in a year and underestimate what they can achieve in a decade. If you just walk for a couple of hours every morning, you can cover an awful lot of ground.”


Leading and Managing

From years of observing and working with CEOs, Tim has developed five basic things you should keep in mind when approaching a discussion with somebody who is reporting to you. These ideas are encompassed in the acronym: SCRIM.

  • Suitability

There is definitely a limit to the resources (time and capital) you can spend on trying to improve or train someone that just will not fit. The sooner you can recognize that you probably hired the wrong person, or you gave them a role they are not suited for, the better.

  • Coaching your reports

Founders and CEOs often fall into the trap of hiring people who have accomplished everything before the job they need to do. Not only can this be expensive, but it may be unfulfilling for them. It’s great to hire people for potential and skills, but then it’s your responsibility to coach them so they acquire the specific knowledge needed in your business. I often see founders get the hiring for potential right, but then ignore the fact that the person needs some help and support to perform best.

  • Regularity

It is all well and good for someone to know what to do but having the required frequency of contact is important to execute and function reliably.

  • Involvement/Incentivization

It is crucial to ensure that everyone reporting to you feels excited about what they’re doing and what you’re all trying to achieve together. Aim to give others a shared sense of destiny with the success of the company.

  • Metrics

There is no getting around the hard quantitative data that shows you whether a person is doing a good job and how well things are going week to week.

“My sense is that the CEO who touches all those bases is unlikely to go too far wrong in managing a team”

Getting along with your co-founder

“In terms of failings…a second big slice will be falling out with co-founders. Very often things tend to get ignored until the point where there’s actually a problem that can’t be fixed.”

Having honest conversations with your co-founder can be difficult, but it is one of the most crucial things you can do. Sugar coating things often leads to misunderstandings that can fester like an untreated wound. Be transparent with feedback, expectations of each other and roles.

Tim also talks about the importance of responsibility and involvement. A failing CEO is often either neglecting others or micromanaging them. He advocates for striving to find the delicate balance between the two:

“If I am the outside person, and my job is to reach out to 30 VC funds, then you as my co-founder and co-CEO are allowed to say, so how’s it going? How many have you reached out to, and where are they?”

Delegate responsibility but maintain some degree of involvement and presence for others.

The 3 things a founder can do to run a successful business:

  1. Find the right market

There is an awful lot of founders who are building products which either aren’t going to serve enough people, or they’re serving people that don’t have enough money at their disposal to build a real business.

  1. Get the product right

This is a very early-stage consideration, but it is surprising how many companies go much further than they ought to in scaling before they have the product right. Build the foundation first.

  1. Scalability

Recognizing that ultimately your ability to scale a business is all about the people. Specifically, hiring people who can run the business at 100x the size it is today.

To run a company at scale effectively, you are going to need skills which you may not have today. The reality is that you may have to acquire the skills “while the airplane is still in mid-flight.”  Having the courage to admit and recognize your limitations is often the most effective way to lead – trust and learn from others.

Startup: Thirty-Six Lessons from Company Founders & CEOs, Tim’s new book, is available from Amazon. It is an invaluable tool at all stages of leadership: whether you are a budding entrepreneur or a seasoned CEO. Strive to learn and growth will follow.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Welcome to the Everything Bubble!

The warning signs of market mania are everywhere. P/E ratios are high and climbing. Bitcoin rose 300% in a year. There is a deluge of SPAC IPOs. Real estate prices are rapidly rising outside of dense major cities.

S&P 500 PE Ratio

BTC Prices Last 12 Months

These, along with retail-driven short squeezes, mini-bubbles and increased volatility are symptoms of a bubble.

At first glance, the fact that we are in a bubble might seem surprising with millions unemployed or underemployed. However, during the pandemic, personal income rose by over a trillion dollars due to historic levels of government fiscal stimulus.

Wages only dropped $43 billion March to November. While many low-end service workers lost their jobs, higher paying professional jobs were unaffected, and some low skilled jobs boomed such as warehousing and grocery stores, leading to lower losses than might have been anticipated.

The scale of the government support programs was unprecedented. Unemployment insurance programs pumped $499 billion into Americans pockets. The $1,200 stimulus checks to most American households added another $276 billion. All in all, Americans had over $1 trillion more after-tax income March-November 2020, than in 2019. As a result, US bankruptcy filings hit a 35 year low in 2020!

On top of that, discretionary spending fell dramatically. Services spending fell by $575 billion as people did not go on vacation, to restaurants, movie theaters, sports venues, concerts etc. While Americans spent a bit more on durable goods, overall spending still fell by $535 billion.

When combined with the increase in personal income, Americans saved an extra $1.5 trillion!

While part of that extra cash went into deposits, a lot of it also went into investing, inflating asset prices. This comes on top of the flood of liquidity unleashed by the Federal Reserve and its commitment to keep rates near zero- in fact real rates are now below zero.

The value of asset prices should be the net present value of their discounted future cash flows.

Interest rates near 0 can justify much higher valuations. If you believe that rates are now going to stay near 0 forever, the current valuations are in fact reasonable. I, for one, do not believe that to be the case considering most global governments are suffering from deteriorating fiscal positions from unsustainable growth in deficits and debt.

A day of reckoning is coming, but it may not be as soon as I fretted in my year end update. I suspect that I cried wolf too soon. The world will remain more preoccupied with fighting COVID than the consequences of the increase in government debt for the foreseeable future. On top that expected increases in both private and public spending should further boost the economy.

The US savings rate has been around 7% for most of the past decade. While it declined from its 33% peak in April, it is still around 13%. I suspect that once COVID is behind us, there will be the party to end all parties. People are going to travel, party and spend like there is no tomorrow. If the savings rate returns to its ex-ante level of 7% that will mean an extra $1.2 trillion in spending. On top that there is another $1.9 trillion stimulus package which likely includes $1,400 in direct payments further pouring fuel on the fire.

In other words, I think we have a way to go before this bubble pops. During the tech bubble, I was writing it was obvious we were in a bubble years before it popped. Likewise, during the real estate bubble I warned all my friends away from buying real estate starting in 2004. Given the circumstances, we are more likely in 1998 or 1999 than February 2000.

How will this all end?

Asset price bubbles can pop absent a financial crisis as happened during the tech bubble. We cannot tell when investor sentiment will no longer be as optimistic as it is now and it will probably come after the orgy of spending I expect once we put COVID behind us.

However, trouble is brewing considering all the government and corporate debt overhand from COVID. There are several ways out of this.

1. We grow out of it

This is not unprecedented. During WW1 and WW2 government debt ballooned. However, after both wars, there was strong economic growth coming from strong consumer demand and strong investment. It may happen again. After a few decades of productivity growth stagnation, we may be on the verge of a productivity boom. COVID has led to a massive increase in adoption in digital payments, telemedicine, industrial automation, online education, ecommerce, and remote work. On top of that the speed of the development of mRNA vaccines gives hope that a lot more innovation is in the cards in healthcare.

2. We inflate

The US is also clearly trying to increase nominal inflation to keep real rates negative which helps the government deleverage, as it did after World War 2. Real rates are now negative again.

US 5 Year Treasure Yield Curve Rate

Given the size of the stimulus and the expected increase in demand, I suspect they will succeed in pushing nominal inflation above 2% as the Fed is targeting.

Note that such an outcome is not always guaranteed. Japan failed to create inflation for most of the past 30 years despite massive government spending and quantitative easing. You can also overshoot and create high inflation as Zimbabwe highlighted in the last two decades.

Controlled inflation in the 2-3% range would be the ideal outcome.

3. We run surpluses

After both world wars, there was a strong social and political consensus in favor of budgetary restraint and debt reduction.

Germany decreased its debt to GDP ratio from 82.4% in 2010 to 59.8% in 2019 by running surpluses.

Likewise, Greece was forced to run surpluses and mend its profligate ways as part of the bailout conditions.

My perspective on what will happen

The US no longer has the discipline to run surpluses, but can keep sustaining deficits as long as the dollar remains the global reserve currency. The day of reckoning will come but does not seem to be in the cards in the near term, so the US debt will keep ballooning.

For a while I fretted that the next financial crisis would take the form of a sovereign debt crisis in a major economy as investors feared it could no longer afford its debt level, as happened in Greece a decade ago. Italy, with its debt to GDP ratio set to exceed 150% in 2021, came to mind.

I am no longer sure that is the highest probability scenario. The euro crisis showed Europe was willing to do anything to anything to preserve the euro and I expect this time to be no different. While there might be a sovereign debt crisis, we would probably find a way to muddle our way out of it.

As a result, I wonder if instead the next crisis will not come as a crisis of faith, but in fiat currencies writ large. I do not see this happening in the next year or so. However, there will be a day of reckoning given the ever-expanding money supply combined with unsustainable growth in debt and deficits in almost every major country in the world. 

What to do as individuals living through this bubble?

It is unclear why and when the bubble will burst, but there are a few ways to be ready for when it bursts.

First, in this environment you should own no bonds whatsoever. Yields are insanely low, and you are not being compensated for default risk. At the same time, you are at risk of inflation.

Second, I would increase dramatically your cash holdings to 20% or more of your assets.  You are not earning anything on that cash, and you lose the inflation value. On top of that it would be debased in a fiat currency crisis. However, having liquidity is useful in other types of crisis where people take a flight to safety when bubbles burst. It provides safety, flexibility, and allows you to buy assets cheaply. At the same time, you can move out of cash, if necessary, should inflation spike.

Third, avoid margin like the plague. While inflation decreases the value of your debt (and mortgages are ok), you do not want to be exposed to margin calls when the bubble bursts and assets decrease in value. Many wealthy people went bankrupt that way during the financial crisis of 2007-2008.

Fourth, own high-quality stocks. They increase in value in an inflationary environment and retain more value when asset prices fall. In other words, do not suffer from FOMO and pursue the latest investment craze (Bitcoin, Gamestop etc.). This is not to say you should necessarily sell your Bitcoin if you own some. It is a form of digital gold that could be a good inflation hedge, but I would not be looking to add to my position at the current price levels.

You should not try to short the bubble because as Keynes said: “the markets can remain irrational longer than you can remain solvent”. A better way to play the bubble is to create assets like a tech startup or a SPAC.

Note that in my case I do not even own stocks. I have a barbell strategy with only cash and early illiquid privately held tech startups. If you have enough diversification (meaning over 100 investments) to account for the startups that fail, private early-stage tech startups are the best asset class. They create value for the economy and can grow rapidly. As such they are amazing to own in both inflationary and deflationary environments.

Note that I strongly vary the balance of my assets between cash and startups. Sometimes I am all in startups. Sometimes I keep large cash reserves. Right now, I am building my cash reserves while still investing. I particularly like the arbitrage of selling overvalued public tech stocks (or pre-IPO companies) and investing in somewhat less overvalued early-stage tech startups. However, I suspect having large cash reserves will come in handy at some point in the next few years.

Good luck!

Episode 17: The State of Solar

This week Kerim Baran shares where we stand in the world of solar. He covers:

  • The history of solar
  • The impressive decline of the cost of panel over the last 40 years
  • The decline in the cost of batteries
  • Why ultimately batteries plus panels will cost less than maintaining the grid leading most electricity to be made locally in a distributed fashion even if fusion comes to pass and creates energy at 0 marginal cost
  • Why we will have a hybrid setup of grid plus local production for the foreseeable future
  • What to do if you are interested in solar

For your reference I am including the slides Kerim used during the episode.

State-of-Solar-Playing-with-Unicorns-5

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on: