Episode 22: How We Think about LATAM vs Other Emerging Markets

GGV Capital’s Hans Tung and Zara Zhang discuss the firm’s recent investment in Yellow, a leading micro-mobility startup based in Brazil, which recently raised $63 million in Series A led by GGV Capital.

Yellow launched Brazil’s first dockless bike-sharing service in Sao Paulo in August 2018. It has also begun piloting e-scooters and developing e-bikes to provide a comprehensive micro-mobility solution to users in Brazil and beyond. Additionally, Yellow offers digital payments through its Yellow Pay platform.

We discuss how the investment thesis came together, and what it means for emerging market countries to have founders who aspire to play on a global scale. Hans discusses the characteristics in the team and the market for Yellow that made the investment so compelling. We also discuss the similarities between Latin America and Southeast Asia, and why startups across the world are starting to take inspiration not just from Silicon Valley, but also from China.


HANS TUNG: Welcome to the 996 podcast, brought to you by GGV Capital. On this show, we interview movers and shakers of China’s tech industry as well as tech leaders. We’ll have a U.S. China cross-border perspective. My name is Hans Tung, I’m the managing partner at GGV Capital and I’ve been working at startups and investing in them, in both the U.S. and China, for the past 20 years.

ZARA ZHANG: My name is Zara Zhang. I’m the investment analyst at GGV Capital, and a former journalist. Why is this show called 996? 9-9-6 is the work schedule that many Chinese founders have organically adopted.

That is, 9am to 9pm, six days a week.

HANS TUNG: To us, 996 captures the intensity, drive and speed of Chinese internet companies, many of which are moving faster than even their American counterparts.

ZARA ZHANG: Hi everyone. On the show today, we’ll continue with our new series, where instead of having a guest, Hans and I will talk about a particular topic that is of interest for our listeners. On today’s episode, we’re going to talk about why we invested in Yellow.

So we at GGV recently announced a major investment in Yellow, a leading micro-mobility platform based in Brazil, which has raised $63M in Series A led by GGV Capital.

Yellow launched Brazil’s first dockless bike-sharing service in São Paolo in August 2018. It has also began piloting e-scooters and e-bikes to provide a comprehensive micro-mobility solution to users in Brazil and beyond. Additionally, Yellow also offers digital payments through its Yellow Pay platform. So you might be thinking, “why are we talking about a Brazilian startup on 996, a show about tech in China?”.

Because our decision to invest in Yellow is very much informed by our experience of investing in China. So Hans, could you share more about this linkage and why you made this decision?

HANS TUNG: Sure. I think by being a global VC firm, we have data points from multiple regions around the world. Before we decide to make this investment in Yellow in Brazil, aiming at Latin American region, our partners Jixun and Jenny made a number of investments in the mobility space whether it’s DiDi in China, Hellobike in China, Grab in Southeast Asia, and lead our investment in Lime in the U.S., and there are a number of other investments that have been made in this category. We should realize that urban mobility is a global phenomenon that given urbanization and traffic congestion, and pollution, it’s more solution needed to solve those problems. And those problems that are not just in Beijing, Shanghai and Shenzhen, but also in Mumbai, Bangalore, Jakarta, Kuala Lumpur, Singapore, New York, San Francisco, L.A., as well as in São Paulo and Mexico City, etc.

When you look at São Paulo, it is the fourth most congested city in the world. It has a subway system that takes care of 8 million riders a day, comparable to Tokyo, and just under 9 million for Beijing. Yet traffic congestion is still a major problem because of urbanization. So it is a problem that we know is a global, and the solution will be global as well.

Secondly, when we look at this team, this team is very impressive. The CEO Eduardo Musa has a manufacturing background. He built up a largest bike manufacturing company in Brazil. He’s familiar with supply chain in China, and he’s sold his company successfully to a Canadian player a couple of years ago.

And his two other cofounders, Head of Product and Head of Technology, both came from 99. For those who have tracked what DiDi has done worldwide, DiDi invested in 99, which was the largest local ridesharing company in Brazil, out of São Paulo, about two years ago, and then acquired it at the beginning of this year. So there are people who decide to leave 99 to do their own thing, and thanks to Carlo from monashees, one of the top early stage venture funds in Brazil, Eduardo Musa met up with his co-founder Ariel and Renato. So all of them spent different time in China looking at how Mobike, ofo, and Hellobike has started to take over China with bike sharing.

And so it’s interesting that the VCs are having a global lenses. Founders themselves are increasingly more global, and looking for ideas and inspiration and solutions, not yet from the U.S. anymore but also from China as well. So having that duopoly of data points makes a lot easier for both the VC and the founders to decide what to tackle next.

So a lot of problems that people are facing today are global in nature and you can find solutions and inspiration globally.

Thirdly, we like Yellow not just because it is interesting from a micro-mobililty standpoint (they have bikes, scooters, e-bikes and other things), but in addition because over 80% of the population in Latin America are unbanked, meaning that they don’t have a banking relationship. They don’t have deposits, or savings or checking accounts. So a lot of people carry cash with them. And how do you get people who only have cash to participate in mobile payment, to participate in e-commerce, to pay for services? Coming up with a QR code-based solution like Yellow Pay, which has some semblance to WeChat Pay, makes a ton of sense. And if the 99 team had not worked at DiDi after the acquisition and had not seen what was happening in China, they probably would have taken a longer time to come up with a solution. So the fact that this is almost two companies into one mixed with an experience team who have a successful several exits, made it a lot easier for us to make a bet in a new region for us.

ZARA ZHANG: And why is this so significant that founder and CEO Eduardo Musa has a background in manufacturing?

HANS TUNG: Good question. I think for most of us, we grew up or worked in or invested in China, then China has a unique advantage because it is the manufacturing center or factory of the world. So it is very easy to get a hardware product prototype iterated and manufactured at mass scale extremely quickly. But to do that from the U.S. or from Europe is very difficult. This is why you see in the drone space that DJI is probably the most competitive and most aggressive at launching new products extremely quickly and being able to overcome a lot of competitors worldwide in this market.

And so for bike sharing and scooter sharing, we also thought that given the tariffs and barriers that exist in Latin America, imports will always cost more or take more time unless you airlift, which increases costs. And if you can manufacture locally, than the spare parts can be recycled and it is more environmentally friendly and also cost efficient.

So for a variety of reasons, having a more vertically integrated approach in the Americas, especially Latin America, in theory makes a lot of sense. The challenge is to find a team that has interdisciplinary knowledge, meaning that they are people who understand offline manufacturing production as well as understand internet product iteration and technology backend skill.

So this team, having had the best of both worlds, was very rare and exciting for us.

ZARA ZHANG: And it was really exciting for me as well as I’m seeing GGV becoming more and more global everyday. And actually, we just went on a trip to Southeast Asia a month ago where we went to Singapore and Jakarta and met with local entrepreneurs and VCs and really saw the energy of the entrepreneurial landscape there.

So how do you think of Latin America, as a region, going forward? Because a lot of people still have reservations about the political instability or macro factors. Are you at all worried about these issues and how do you think about the future of the region?

HANS TUNG: I lived through the Asian financial crisis in the late 90s. I was working in Singapore at that time. So I saw what was happening in the region. And even as someone who lived in the U.S. for almost 20 years, if you track what was happening in Latin America over the last 20-30 years, you see that foreign exchange rates have shown quite a range of volatility. Economic growth will also oscillate as well. But I think the key lesson that we learned from investing in China is that when you have enough of a Internet penetration, whether its through desktop or smartphone, you have a chance to have a foundation to let technology make changes in society and bring about efficiency.

As an investor in Alibaba since 2003, GGV saw firsthand how Jack Ma brought about a whole e-commerce era into China out of nothingness because he was smart to leverage internet penetration and use that to build Taobao and then Tmall.

So when we see there’s enough of a smartphone penetration adding users on the Internet, coupled with urbanization trends, you start to see a middle class forming. You see that they operate in a more efficient manner because of the benefit of technology and benefit of proven business models in mobile Internet sector.

So when that happens, we feel that a new economy will emerge and it will grow at a faster pace than the old economy. So the society will become more stable over time and more founders will be able to make impact with things to learn from both U.S. and China.

So that’s our hypothesis that we’re seeing some of that happen in Indonesia, Southeast Asia and Latin America already.

If you count the number of unicorns in Indonesia, you have Tokopedia, Bukalapak, Traveloka, as well as Go-Jek and Grab.

So there are five or six unicorns in Indonesia already in a country that has almost 300 million people and a GDP per capita roughly around $3,000 USD and that’s similar to what China was about ten years ago. And you look at Latin America, you also see a number of unicorns.

You have 99, which was sold, and Movile backed by Naspers, and Rappi and you have a publicly traded one in MercadoLibre. So you have a number of public and private unicorns forming in Latin America already, because smartphone penetration rate in Brazil is now 50 percent and in Mexico is 33 percent.

So you start to see early indicators in Latin America even though there’s a quite a bit of disparity between rich and poor. Overall GDP per capita is roughly around $10,000 USD or more in some of the major countries. So you are seeing that in both regions, whether it is Southeast Asia or Latin America, there are things that founders can learn from U.S. and China.

And that’s where in those selected areas, where we think of our existing investment roadmap could be helpful to them, we are willing to consider whether to make that investment and help them to scale.

ZARA ZHANG: And I find it really interesting that these days entrepreneurs in emerging markets are not just learning from Silicon Valley but also learning from China a lot. They call themselves like the “Meituan of Southeast Asia” or the “Toutiao of Latin America” or wherever. So Silicon Valley is no longer the only place where they can take inspiration from.

HANS TUNG: You know back when GGV was founded 18 years ago, the world had roughly less than a few hundred million Internet users, and most of them were in the U.S.

So it’s very easy for whatever works in Silicon Valley would also work everywhere else around the world. Over the last 18 years, you see China emerging and almost has just as many unicorns as the U.S. does.

And China, as a developing country, has four or five different tiers of cities, and in these four or five different tier cities, each one has different GDP per capita. So if you look at that, you can almost argue that if you discount the language barrier, China has seen any kind of issue, at least most of the issues, that an emerging market country has to go through in one of those tier of cities.

So whatever problems you’re trying to solve in your own home country that is a developing market, somebody in China has encountered something similar and has figured out some way to deal with it. So at a minimum, knowing what China has done is a higher starting point to make it easier to figure out what kind of localization (and there will be a lot of localization) that’s going to be needed in your home country.

But at a minimum, having both U.S. and China as a place to learn makes it a lot easier to skip things that that may not work and be able to zoom on stuff that potentially could work.

And that saves a lot of time and energy.

ZARA ZHANG: And one of the areas we invest in is called Chuhai (出海), or Chinese founders targeting other emerging markets around the world. I wonder how do you think Chinese entrepreneurs compare with local entrepreneurs when it comes to these new markets? Because of their experience of scaling companies in China, are they more advantageous when it comes to go into these markets? Or will the locals win the day in the end?

HANS TUNG: Right. That’s that’s the $1 billion question. I think a lot of people like to ask us because we’re both in the U.S. and China, are there more Chinese companies coming come to the U.S., or can U.S. startups ever crack China? I think that’s a common question that the media and other folks like to ask us, but what we actually are seeing over the last several years is that the U.S. startups do better in the Americas, especially in North America and parts of western and northern Europe and then potentially Australia and New Zealand. Some of the larger technology companies from the U.S. are expanding into India, leveraging the high quality of Indian executives that’s already working at Silicon Valley companies and want to do something else in the country as well.

So that’s where the U.S. companies tend to spend time and do well in. And for the Chinese companies, going after Greater China and then Southeast Asia, and maybe India maybe not, but then Middle East and Eastern Europe and even Africa are very natural. DiDi is probably one of the few exceptions that are in Brazil and Xiaomi and Huawei, are some of the new entrants that are in Mexico.

So you do see Chinese companies competing better in the developing world and leveraging what they have tested in that. So the question is will the local startups in developing countries do a good job of meeting that challenge from Chinese companies?

Can they collaborate? Or will they learn very quickly and be able to leverage their lessons from U.S. and China and therefore apply localization as needed very quickly in their local countries?

We do see that the Chinese strategics, like Alibaba, Tencent, JD, and Xiaomi, have become more open to make strategic investments in these local countries. Also Didi, Bytedance and others as well. I think that you will see a lot more strategic investment from China with the fast rising local startups so that there’s a way to work together and for the local startups to learn more from the Chinese partners.

I think that’s probably the most common collaboration going forward. You will also see that companies like Shopee, that took money from Tencent, and then are building their own businesses in Southeast Asia because many of their executives have spent a portion of their life in Southeast Asia. Now these kind of hybrid teams, there could be some, but they may not be majority. Over time, there could be more of them.

But we think that a collaboration between Chinese companies and local startups will happen more. There are companies like Alibaba that have bought Lazada in Southeast Asia. They are operating with people sent from Hangzhou. DiDi is sending people from Beijing to Latin America. It remains to be seen that the team from China without much international experience can successfully adapt to a local market, and that’s something that we’re closely monitor as well.

ZARA ZHANG: All the founders we’ve met in Latin America and Indonesia are very fluent in English.

HANS TUNG: Yeah, that’s the one thing that caught our attention when we’re in both Southeast Asia and Latin America. I think that’s why it’s very interesting for us to see these founders that are learning quickly about what’s happening in the U.S., but increasingly willing to learn from folks like ourselves about what’s happening in China, and even go to China on their own through their alumni network.

So there are more Chinese people that are studying in Southeast Asia and Latin America. It makes it easier to foster collaboration between startups in those regions with China because it makes it easier for local founders to go to China and through the alumni network and friends network, be able to learn what else is happening there. We think that the world be a much safer and better place with this and more knowledge sharing and more understanding of each other and people benefit from each other’s knowledge.

ZARA ZHANG: Yeah and 996 itself has a very global audience. We actually have a pretty sizable audience in places like Southeast Asia and Latin America. We were kind of surprised how it caught up quickly with these global markets. I think that’s because people around the world are increasingly realizing the importance of learning from China, no matter where they are.

And I also wanted to touch on the topic of payment, because part of Yellow’s product is that they not only do transportation and mobility, but they are also launching the Yellow Pay platform, which is similar to Alipay and WeChat Pay in China. It’s QR code-based, so it allows users to transform cash into digital credit for Yellow’s services. So through a network of certified points-of-sales, such as convenience stores, newsstands and bakeries, users can buy Yellow credits in cash by scanning a QR code and then apply those credits to Yellow rides.

And we’ve seen the power of QR code-based mobile payment in China, where the mobile payment market is 10x larger than that of the U.S. And just like how Alibaba incubated Alipay and Grab incubated GrabPay, we believe the Yellow Pay also presents a great opportunity in the region. So why do you think payment is such a huge opportunity and why do you think Yellow has a chance to make that happen?

HANS TUNG: In China, mobile payment became popular partially because credit card penetration is limited. A lot of merchants don’t want to spend money to have terminals to process credit card transactions. And then when the smartphone becomes quite popular in China, WeChat Pay was born and it made it a lot easier to tip the merchants or buy stuff from merchants or pay your friends for money you owe them or just give red envelopes during Chinese New Year, or encourage people to answer polls to provide information and knowledge to you.

So WeChat Pay really took off in China, and now almost everywhere you go, there are a lot of vendors who don’t even want to take cash, but only accept WeChat Pay. And so how fast it rose, amazed us.

Now looking at both Southeast Asia and Latin America where a high percentage of population is unbanked, they don’t even have a bank account, in China with WeChat Pay, at least you can link your WeChat Pay or Alipay to a debit card, in some of these emerging markets, most people don’t even have a debit card. So can they leapfrog from a cash-based society to a QR code-based payment society?

We think there’s a high chance that could happen if those countries already have high enough smartphone penetration rate. So that’s our hypothesis that we think will be very popular and we’ll see over the next five years whether that will bear fruit or not. But it’s definitely makes an exciting experiment.

ZARA ZHANG: Yeah, Ant Financial is worth more than Goldman Sachs.

HANS TUNG: (laughs) It’s hard to imagine. We have a lot of respect for Goldman Sachs and any investment bank, but it’s impressive that in the last decade or so, Ant Financial has become a powerhouse.

ZARA ZHANG: So you you took a trip to Brazil a couple of weeks ago yourself. What was your impression? What did you see?

HANS TUNG: Whether it is going to Jakarta or São Paulo, it is impressive to see the fast pace of urbanization in these developing markets. And also you see that there’s just a lot of activity, a lot of founders who are impressive and well-educated and thoughtful and want to do something for their country. Whether its founders we met in Jakarta, or folks at Yellow in São Paulo, every one of them is trying to figure out how can we leverage technology and business models that they’ve seen elsewhere to help their country to become more prosperous, safer and facilitate the growth of a new economy that will bring more efficiency to the society and bring benefits to the mass market and the unbanked population.

And I think that is extremely important values. For something to be big, like Alibaba and WeChat and Tencent to get big in China, they have to bring something that’s useful to society, to bring technology and democratize it, and bring benefits to the mass market. If you don’t do that, then the business will have more niche impact and that is just not going to be as big. So seeing more founders who are willing to do that makes our job exciting and interesting every single day. It makes our life have some meaning as well.

ZARA ZHANG: So my last question is, I think all of this is true and saying it is easy, but having the guts to bet on a brand new region and a significant amount of funding into a region that is pretty new to us takes a lot of courage. So what was the tipping point for you when you realized this is something I really wanna bet on? What was that decision process like for you?

HANS TUNG: I think talking to both Eduardo and his team Ariel and Renato was important. Also, speaking to other VCs in the company, whether it is Carlo from monashees, and TJ and Ade from Base10 and others at Class 5 and Grishin Robotics, you can tell it is a group of people, whether it is VCs or founders who want to make a huge difference in their region and they’re very willing to collaborate and share knowledge and take notes from other regions like the U.S. and especially China, which is very new for most people.

Some of the VCs we work with have even traveled to China already. If I look at the website for monashees, it’s in four languages: Portuguese, Spanish, Chinese and English. So when you see other people who share more of the 996 values, they are much more collaborative and global, it makes it a lot easier for us to feel that we’re on the right side of history.

And Zara, you have done an amazing job of launching this podcast, and also organize the meetups. Every meetup we go to, we see people who have lived in five cities. It’s very common to have lived in five cities. Some have even lived in ten, like myself. And you see people who have traveled around the world, and they see more things and they are faster at connecting the dots and want to be helpful.

That just gives us a lot of hope and reminds us what we saw in China about 15-18 years ago. So VC is a business of recognizing patterns. The smarter and more successful VCs end up seeing the patterns sooner and needing fewer data points to do so. And hopefully our hypothesis based on what we have seen elsewhere will be right about Southeast Asia and Latin America. I think we are very focused on investing in the areas that we know. We’re not experts in many other things. So we’re focused on trends that we think are global in nature and want to share what we know from the U.S. and China to be helpful to other people.

ZARA ZHANG: Cool. Thanks for listening. And if you have any feedback or want to reach Hans and I directly, you can join our listeners community on WeChat or Slack at 996.ggvc.com/community.

HANS TUNG: Thank you, Zara Thanks for listening to this episode of 996.

ZARA ZHANG: GGV Capital is a multi-stage venture capital firm based in Silicon Valley, Shanghai and Beijing. We have been partnering with leading technology entrepreneurs for the past 18 years from seed to pre-IPO with $3.8 billion in capital across eight funds. GGV invests in globally minded entrepreneurs in consumer, new retail, social Internet, enterprise cloud and frontier tech.

GGV has invested in over 290 companies with more than 45 companies valued at over $1 billion.

Portfolio companies include Airbnb, Alibaba, Ctrip, Didi Chuxing, Domo, Hashicorp, Hellobike, Keep, Slack, Square, Toutiao, Wish, Xiaohongshu, YY, others. Find out more at ggvc.com.

We also highly recommend joining our listeners WeChat group and Slack channel, where we regularly share insights, events and job opportunities related to tech in China. Join these groups at 996.ggvc.com/community.

HANS TUNG: I want to tell you about our sister podcast: Founder Real Talk. It is a biweekly show that gets real with founders about the challenges that founders and startup executives face and also how they have grown from tough experience. This show is hosted by my fellow managing partner at GGV Capital, Glenn Solomon out of our Menlo Park office, produced by ouyr colleague Fischer Yan out of San Francisco office.

Past episodes of the show include Stewart Butterfield from Slack, SLOC Sarah Friar from Square and Nate Blecharczyk from Airbnb.

You can take a listen by searching “Founder Real Talk” in any podcast app.

HANS TUNG: If you have any feedback on this podcast, or would like to recommend a guest, please email us at 996@ggvc.com.