20VC LATAM Part 2 a16z's Angela Strange on When To Expand Beyond Your Core Market, Why Serving the Unbanked is Such Good Business & Whether the Startup Will Acquire the Distribution before The Incumbent Acquires the Innovation

In this 20 VC feature week focused on LATAM, Angela Strange, general partner at Andreessen Horowitz, discusses the burgeoning potential of the Latin American market. Angela, with her extensive background at Google and a passion for financial services, offers insight into the region's unique challenges and opportunities, particularly in fintech. She highlights the significant underbanked population, the high profitability of LATAM banks, and the rapid shift to online payments spurred by the pandemic. The conversation touches on the importance of local knowledge, the rise of regional unicorns, and the evolving exit landscape. Angela also emphasizes the low distribution and infrastructure costs that enable new ventures to serve broader demographics profitably. The discussion also covers the influx of venture funding into LATAM, the strategic timing of expansion and fundraising, and the collaborative dynamic between local and international VCs in nurturing startups.

• This episode is part of a special feature week focused on Latin America (LATAM).
• The aim is to gain an external perspective from a non-LATAM-focused fund.
• Angela Strange from Andreessen Horowitz provides insights into the region's potential.

"This is part two of our very special feature week of LATaM here on 20 VC."

The quote introduces the context of the episode, indicating that it's a continuation of a series with a spotlight on the LATAM region.

• Angela Strange is a general partner at Andreessen Horowitz.
• She has a strong focus on financial services investments.
• Angela has been involved in significant investments in LATAM startups.
• Her previous experience includes being a product manager at Google.

"As for Angela, she largely focuses on investments in financial services, and Andreessen has made some very significant investments in LATaM over the last few years in the likes of Loft, Jeeves, Pomelo and Addy, to name a few."

The quote summarizes Angela's investment focus and highlights her involvement in notable LATAM investments, indicating her expertise in the region.

• Angela's journey into venture capital was not straightforward.
• She had an early interest in financial services and considered becoming an accountant.
• A family friend advised her to study engineering for broader career options.
• Angela managed a student pub, giving her a taste of business management.
• Consulting firms offered to teach business skills and pay for business school.
• She joined Oliver Wyman, leading to her attendance at Stanford's Graduate School of Business (GSB).

"I grew up in Ottawa, Canada... And then a good family friend sort of talked me into doing engineering rather than accounting because I would have potentially a broader purview of career options."

The quote explains the influence of a family friend on Angela's career choice, which ultimately led her towards venture capital rather than accounting.

• Angela pursued running marathons seriously, aiming for the Canadian Olympic team.
• She incurred a significant debt to her consulting firm when she decided to train full-time.
• To pay off her loans, she interviewed entrepreneurs and made video case studies at GSB.
• She joined a venture capital firm, then transitioned to a startup that was acquired by Google.
• At Google, she worked on mobile Chrome for iOS and Android.

"I went to get a job at a venture capital firm, worked there for a couple of years, realized that you are infinitely more valuable to startup founders if you know what it is to walk in their shoes."

The quote reflects Angela's realization of the importance of firsthand startup experience for a venture capitalist, which influenced her career path.

• Angela's passion for financial services led her to the fintech industry.
• She applied her product background to financial services, moving beyond her initial interest in accounting.
• A recruiter from Andreessen Horowitz recognized her unique combination of skills and experience.
• Angela joined Andreessen Horowitz seven years prior to the podcast.

"I could see well, I can apply my product background to financial services versus being an accountant."

The quote illustrates Angela's transition from a potential career in accounting to a role in fintech, leveraging her product expertise.

• LATAM is a large region with 650 million people across 33 countries.
• Brazil and Mexico are the two largest countries in LATAM.
• Entrepreneurs often start businesses in one country with ambitions to expand across the region.
• Expansion in LATAM is challenging due to different regulations, infrastructures, and cultural nuances.
• Successful examples include Nubank and dLocal.

"Latam as a whole is large. It's 650,000,000 people in 33 countries. But to your point, the two largest, Brazil and Mexico."

The quote highlights the vastness of the LATAM market and the significance of Brazil and Mexico as key players, setting the stage for discussions on market strategy and expansion.

• Founders need to establish a successful playbook in their initial market.
• Being a market leader in one country is preferable before expanding to others.
• Timing and understanding of distribution and product-market fit are crucial for expansion.

"You need to figure out the playbook for the market that you've started in, right? And so being number five for a business like being the number five robin Hood in Brazil and then expanding to Mexico to be the number six in Mexico is not going to be a booning business model."

The quote emphasizes the importance of mastering the home market before considering expansion to ensure a strong foundation for growth.

• Evaluating when to expand a business into new geographies, considering the complexity and resource allocation.
• Assessing company bandwidth and readiness for geographical expansion.
• Importance of adapting business models to local nuances while maintaining core successful elements.

"Building a business in two totally different geographies is arguably twice as hard. So have you figured out enough such that you can spend the resources to expand to that next country?"

This quote emphasizes the challenge of expanding a business into different geographies, highlighting the need for thorough preparation and resource availability.

• Dilemma of raising funds before or after expansion into a new market.
• Considerations based on cash runway and the ability to demonstrate growth and value to investors.
• Utilizing strategic hires and initial customer proof points to signal potential success to investors.

"If you've got enough to work through that and get the numbers going in the right direction, then you should raise after because you're going to prove that you're a much, much more valuable business."

This quote suggests that if a company has sufficient cash runway, it should wait to raise funds until after expansion efforts show positive results, thereby increasing the company's valuation.

• The disproportionate focus of traditional banks on affluent customers, especially in Latin America.
• The potential for fintech companies to disrupt the market by reducing distribution and infrastructure costs.
• The profitability of serving less affluent customers through innovative fintech solutions.

"Banks do mostly cater to the affluent in most countries, I'd say in Latin America, it's an even more egregious case to that."

This quote highlights the gap in financial services provided to less affluent customers, particularly in Latin America, suggesting a significant opportunity for fintech companies.

• The role of distribution and infrastructure in the profitability of financial services.
• Comparing the ease of launching fintech services in the US versus Latin America due to available infrastructure.
• The significant market opportunity for fintech companies in Latin America where many are unbanked or unhappy with existing services.

"If it was cheap for me to acquire customers, and I didn't have to say, spend 30, $20 to $30 a month keeping the lights on for a bank account... then I could serve customers that don't spend a lot on my credit card or don't keep a lot of deposits and be very profitable."

This quote explains how fintech companies can serve less affluent customers profitably by reducing acquisition and operational costs.

• The challenge for incumbents to innovate at the pace of new entrants in the financial services market.
• The importance of timing and customer satisfaction in the adoption of financial innovations.
• The potential for incumbents to quickly gain market share in new service categories due to existing distribution networks.

"Wealthfront came out with a pioneered the robo advising. It took them five or six years to get to billion dollars assets under management... But then incumbents like Schwab... launched their own similar robo service and they had many, many more assets under management in a shorter period of time because they already had the distribution."

This quote illustrates how incumbents can leverage their distribution advantage to quickly scale new innovations, using the example of robo-advising.

• Difficulty for traditional banks to attract top engineering talent compared to fintech companies.
• Strategies for incumbents to remain competitive, such as creating autonomous units, acquiring fintech startups, or forming partnerships.

"It is not realistic, to your point, that we're going to be able to attract the world's best engineers. So then why don't we try and figure out how to become the world's best at partnering to give the distribution to the people that have the technology."

This quote discusses the challenge traditional banks face in hiring top tech talent and suggests partnering with technology providers as a solution.

• Emerging startups are recognizing the need to form partnerships early to remain financially viable.
• Partnerships with banks can offer startups a significant advantage due to the banks' larger balance sheets.
• The partnership between Addie, a buy now, pay later company, and local banks in Colombia and Brazil exemplifies a mutually beneficial relationship where banks seek to enhance user experience while leveraging their financial resources.

"And that makes a ton of sense from a partnership perspective."

This quote highlights the logic behind startups partnering with banks - banks provide the financial backing while startups offer innovative solutions to improve customer experience.

• The shift from cash transactions to online payments in Latin America is creating investment opportunities.
• High cash transaction rates in countries like Mexico and Brazil are due to a variety of factors including access, trust, education, and merchant preferences.
• The pandemic has accelerated the transition from cash to online payments, offering a chance to bring the underbanked online and motivate merchants to accept online payments.

"This is where the biggest shift happened. Online payments started growing like 100% month over month. All of a sudden, a large part were forced into not using cash."

This quote explains the rapid change in consumer behavior due to the pandemic, which has led to a surge in online payments as people were compelled to avoid cash transactions.

• Common misconceptions about Latin American startups include the idea that they are merely copycats of companies from other regions.
• Successful companies in one region can be indicators of unmet consumer or business needs in another region.
• Local adaptations and the complexity of operations can make startups in Latin America more defensible and potentially more successful than their counterparts in other regions.

"So I'd flip it as x for y if it makes even more sense in that geography with the local flavor is a better business."

This quote argues against the copycat narrative by suggesting that startups in Latin America that adapt successful business models to local conditions can actually create stronger businesses.

• The psychological aspect of being a local company can be a significant advantage.
• Local companies like Pomelo and Addie have a head start in understanding and building the necessary infrastructure to operate effectively in Latin America.
• International players face challenges when entering these markets due to issues like credit bureau limitations, higher fraud rates, and lack of existing infrastructure.

"So any new international player is going to have to go through that same experience and the local team is going to have a very, very big head start."

This quote emphasizes the competitive edge local startups have over international companies due to their deep understanding of the local market and infrastructure.

• The exit strategy for startups is a common concern among investors.
• The Latin American ecosystem is maturing, with more IPOs and increased interest from global investors.
• As the ecosystem develops, there is a progression of funding rounds, leading to a more robust path for startups to scale and eventually exit.

"There's a lot of capital interest, there's a lot of talented entrepreneurs building great companies, and those scale and those exit and then lps that I'd say are at the very top end of the capital stack, start to get more comfortable with."

This quote explains the evolution of the investment landscape in Latin America, indicating a growing comfort among investors with the region's potential for successful exits.

• The influx of capital into Latin America, particularly in fintech, has led to concerns about high valuations.
• Market size and potential are often underestimated in the short term.
• Investment decisions should consider whether the team can build a multi-billion dollar company and if the market need is substantial.

"Like new bank at a billion dollars, looked pretty damn expensive. What's it worth now? Like $35 billion?"

This quote illustrates that initial high valuations can be justified in hindsight if the company successfully taps into a large market need and achieves significant growth.

• Local investors provide valuable insights into regional markets and can assist with recruitment and understanding local nuances.
• International VCs can complement local investors by bringing global experience and scaling expertise.
• Partnering with a local VC is beneficial as it combines local knowledge with international perspective.

We love partnering with local investors. I think it takes a village to help build a company.

This quote emphasizes the importance of collaboration in building a company, highlighting the value of local investor partnerships.

local investors are going to know how to help better with recruiting, they're going to know better the nuances of the local markets.

Angela Strange points out the specific advantages local investors have, such as better recruitment and market understanding.

We often look to partner with a local VC and then what do we bring?

This quote introduces the complementary role of an international VC when partnering with a local VC.

• Recognizing that poor employees can become great CEOs.
• Angela's biggest miss was not investing in Nubank due to unfamiliarity with the Latin American market and political/economic uncertainties.
• Learning from mistakes involves gaining regional knowledge and understanding market nuances.

Yes, terrible employees often make fantastic ceos.

Angela Strange acknowledges that past employee performance does not necessarily predict entrepreneurial success.

But just the Latin American most painful one is newbank.

Angela shares her personal experience with a missed investment opportunity, highlighting the importance of market understanding.

I've now spent a lot of time getting to know the region, getting to know the founders, understanding the nuances.

This quote reflects Angela's approach to improving her investment strategy by deepening her regional knowledge.

• Emerging ecosystems initially face skepticism about scaling companies due to talent concerns.
• Latin America has strong technical education and is producing skilled graduates.
• Successful companies in the region are creating a talent pool for future companies.
• Global work opportunities attract top talent to fast-growing markets.

The other question I get asked a lot is just how are you going to find the people to scale your company?

Angela addresses a common concern about talent acquisition in emerging markets.

there are lots of unicorns in Latin America.

This quote highlights the growth of successful companies in Latin America, which contributes to a developing talent ecosystem.

now people think about their careers as like, I could live and work anywhere.

Angela points out the global mindset of today's workforce, which benefits companies in emerging markets.

• Importance of multidisciplinary knowledge and avoiding mental traps in investing.
• Balancing focus and breadth is challenging but necessary for providing value to companies.
• Conviction and early commitment to entrepreneurs are crucial in venture capital.
• Confirmation bias is a concern, but the ability of founders to attract resources is a positive indicator.

I am rereading the more you know, which is a like, I would recommend rereading it every five years.

Angela recommends a book that emphasizes the value of a broad knowledge base for investors.

The balance between focus and breadth.

This quote discusses the challenge of maintaining the right balance between specialized and general knowledge.

The power of conviction, especially early conviction, which takes really knowing a market.

Angela highlights the importance of strong belief in an entrepreneur and market understanding.

preferential attachment, which is the best companies and the best founders just have a great way of bringing in people, bringing in capital, bringing in resources.

The concept of preferential attachment is mentioned as a characteristic of successful companies and founders.

• Market size and team capabilities are key factors in investment decisions.
• Infrastructure-focused approaches enable scalability and seamless operations across different markets.
• Jeeves, a credit card and payment platform, was chosen for investment due to its large market potential and thoughtful infrastructure.

Massive market that's underserved.

Angela explains the rationale behind investing in Jeeves, citing the untapped potential of the market.

They have built this orchestration switching layer on top such that by definition, their platform is going to be seamless from country to country.

This quote describes the technical infrastructure that made Jeeves an attractive investment.