At the recent BayBrazil LATAM Summit, Hans Tung joined a fireside chat to discuss opportunities in Latin America (LATAM). The Q&A session was moderated by Margarise Correa, Founder & CEO of BayBrazil, a Silicon Valley-based not-for-profit dedicated to bringing together the Brazilian and American ecosystem of professionals and businesses in the San Francisco Bay Area.
Q: Tell us about GGV Capital’s interest in LATAM.
Hans: We started investing in LATAM back in 2018. At the time, the region had just four unicorns, and now it is over 30.
Q: How do you see LATAM developing over the next five years?
Hans: Smartphone penetration in LATAM is already much higher than in China. The GDP per capita of the region is about $8,000, higher than in Southeast Asia or India. It is a great market for startups, and therefore you see SEA expanding rapidly here with Garena and Shopee. You will see Shopee aggressively continuing to invest in the region, and many local startups will get bigger and bigger.
It reminds me of China five to seven years ago – the speed of change is rapid. Over the last four years, we have also seen the quality of the founders improve dramatically as they have become more experienced.
Q: What sectors are exciting right now in LATAM?
Hans: Let me use China as an example – to create an environment where a company like Alibaba could emerge, China’s economy had to have a solid manufacturing base creating many jobs. Following the 1985 “Plaza Accord,” the yen depreciated significantly, leading to manufacturing moving from Japan, Korea, Taiwan, and Southeast Asia to China over the next 20 years. By the time Alibaba started in the late 1990s, China had already spent almost ten years creating manufacturing jobs. When Alibaba began growing very fast in the second decade, there were already 120 million jobs created in China because of manufacturing. One of the key indicators we look at is how much manufacturing is being moved to LATAM, India and Southeast Asia because that forms a more substantial base of people with higher disposable income to grow.
In addition, having ecommerce marketplaces where you have more sellers selling goods within the region helps create more income.
When we look at investments, we look at not only serving that top 20-30% because that’s much easier to monetize. We’re also looking at investments like Stori, a credit card-focused fintech startup based in Mexico that targets the bottom half of the pyramid, or at least the middle 50%.
Fintech is faster to get started because you don’t need to move physical goods. In China, because fintech was so heavily regulated, ecommerce was the first to take off because it was the least regulated. In LATAM, fintech is needed in the first wave; after that, you will see a lot more ecommerce enablement. We have a lot of investments in fintech, but in the next wave, we are looking at a lot of ecommerce activities as well.
Q: Do you see LATAM’s fintech landscape evolving quickly to catch up with what is happening in Asia?
Hans: In LATAM, it is very easy and strategically important for somebody like Rappi to leverage the high frequency of grocery purchase, ride-sharing and food delivery to accelerate the development of an e-wallet. The challenge is that such a service is great for the top 20-30% of the pyramid; the question is what type of service can be provided to the bottom 70%. And that is the area we need to support a lot more, and it takes more time to monetize.
For example, we are now seeing more startups trying to target B2B services and B2B enablement because the sellers want to get paid sooner and pay their own suppliers; they want to figure out a way to do that much more efficiently. Buy-now-pay-later (BNPL) is happening on the B2B side as well. Having transactions happen and get settled much quicker sooner generates efficiency. This helps support SMEs in the middle part of the pyramid, the 50%.
One of the things that I think the governments in LATAM can do is actively cultivate and recruit manufacturers throughout Asia to move their operations to LATAM and provide tax incentives.
To build growth, you need to have both at the same time and not one after the other.
Q: When you are thinking about cross-border investing, what is your approach to currency hedging, given the fluctuations and their effects on investments?
Hans: When we first started investing in LATAM, that was a question we got a lot from our LPs. Many of our LPs said we lost a lot of money in LATAM. Whatever you make from the company, the currency takes it away. There is definitely some truth in that if you are making private equity investments, where the upside is more limited. You spend more time doing financial engineering to manage the assets better.
The alternative approach that worked for us in Asia was that it would be a 20-50x kind of outcome if you invest in startups early. Then, of course, even if the currency dropped by a third, or one-quarter of what it used to be, you can still make good money. It is a riskier proposition; it is less proven, but we believe in it. And more tech startups are generating more efficiency in the economy, which will hopefully help stabilize foreign currencies. The truth is that we cannot hedge our investments in LATAM. We can only hedge by investing in multiple emerging markets and investing earlier and leveraging what we have learned from other markets in the same sectors. In this way, we help the companies we invest in grow faster and overcome the issue of foreign currency through growth rather than through hedging.
Q: How does the evolving geopolitical landscape impact GGV Capital?
Hans: We know the world’s changing, and we also need to adapt with our investments. Historically, we have been able to navigate through different regions by being global investors and being as neutral as possible but trying to add value from sharing knowledge.
Beyond money and geopolitical matters, sharing knowledge, ideas, experiences, and data points are extremely valuable. This is why we produce The Next Billion podcasts and other content. We have reached over one million downloads over the last three years. People get to know us through the content we create. It is interesting to see people learn and exchange ideas at such a rapid pace, more than ever before. Regardless of what happens geopolitically, sharing knowledge is the single most important thing, and that is what gets me most excited.
Q: How does GGV look at geography? Is it less relevant? Or are you looking at it differently?
Hans: All the LPs were allocated based on geography to find the best deals locally until five years ago. When everybody is growing, that is the right way to do it. But we start seeing that some of the biggest trends, whether ride-sharing, food delivery, or social commerce, become such a major force in the local economy that we can easily share the lessons from one country with other countries and regions.
Increasingly, we do see a sort of blurring of geo lines. Instead of finding the next best investor for a particular category in that region, it is safer to look at what is happening within tech globally and pick the best thesis from the best founders in the best regions and put money in them.
My biggest challenge today is that we do not have enough money, we have seen great opportunities in all the five regions we are in, but it is hard to choose.
Combining operational support with more data sharing across founders and geographies is an easier way to make investments and arguably a safer way.
Q: Is there anything that keeps you up at night? Anything that says okay, at one point, this could go wrong?
Hans: Many things can go wrong geopolitically, and the risk for wars has never been higher over the last few decades. Also, the valuation that funds are paying enterprise startups is over 100-150x revenue multiple, which is definitely not sustainable.
If you look at ecommerce in the US, the penetration rate in retail is 15%, and in China, it is in the low 20s. How much bigger can that get? Can ecommerce become 50% of retail? Because of COVID, we are now seeing many sectors’ digital penetrations rising from single digit to low teens. When that happens, we may see disruption from valuation corrections. But when that does happen, it does not change the fact that digital penetration will continue to occur in every sector, one by one.
Today in the US, it is hard to get goods being shipped to everyone; we have much a much longer wait than before, partly because the supply chains are disrupted and partly because a lot of goods get stuck in the warehouse and ports due to lack of automation, union labor and other issues. Over time, automation will play a bigger role in society, whether we like it or not, and things will get more efficient. The regions that do not do that will get left behind.
You see Brazil changing and other countries in LATAM adapting as well. You are either part of the tech revolution, or you are not. And once someone gets left behind, they will talk about it on social media, which puts a lot of pressure on governments to evolve at risk of seeing people move to places where it is happening. Because of that, I will always be worried about valuation when things get too hot. But even when that does happen, it does not change the fact that the underlying growth and digitization is happening continually.