Kueski and Fintech in Mexico

Kueski and Fintech in Mexico

What’s in it for me:

  • Why Mexico is an interesting market for fintech?
  • Why Kueski is an interesting startup?
  • How Kueski works?

Talking to many investors, I realise that more and more they are interested in what is happening in Latin America. In the last year, we have seemed a couple of great investment rounds in Latin America’s startups from top tier investors such as Sequoia Capital (Nubank in Brazil), Andreessen Horowitz (Rappi in Colombia), Accel Partners (Cornershop in Mexico), just to highlight a few. Here follows a Techcrunch post by Julie Ruvolo, explaining more details, article link.

This way, I decided to start analysing the best startups from Latin America so that people could understand better what’s happening in Latin American startup ecosystem.

For this post, I selected one of the hottest startups in the fintech, Kueski. Kueski is a Mexican startup that received US$ 35 MM round from which US$ 10 MM is an equity investment co-led by Richmond Global Venture, CrunchFund, and Variv Capital (source), and US$ 25 MM is a debt round.

First, let’s start talking about Mexico. Why Mexico is an interesting market for fintechs?

Here follow some important statistic about the country:

  • GDP of US$ 1.063 trillion (15th largest economy by GDP, and the second in Latin America) (source);
  • A population of 128.6 MM people, 10th largest population (source);
  • Only 27% of the population older than 15 years is banked (source);
  • 17.3MM credit card issued, less than 13.5% of the population has access (just for comparison, Brazil has 28% credit card penetration and US more than 40%) (source);
  • Even with credit card, Mexicans prefer to pay in cash in 47% of the transactions while only 36% of the times with credit card (source);
  • There are 44.2 MM smartphone users, a penetration of 34.4% (source);
  • 69 MM users of internet, a 56% penetration (source);
  • Basic interest rate is no 5.75% (source);
  • Credit card average interest rate is 32% (source) and default rate of 5% (source);
  • 56.6% of the population are informal workers, which correspond to 23.6% of Mexico’s GDP (source);
  • Private sector credit is 32.7% of the GDP while in Brazil is 67.9%, and US is 188% (source);

This data show the huge potential for fintech startups in Mexico. It’s a big country where most people are still unbanked without access to credit cards,  but that have access to internet and smartphones. The credit private sector is still small compared to other countries.

Fintechs can exploit these conditions to delivery financial services in new ways. And that’s exactly what they are doing, as Mexico became the most active fintech ecosystem in Latin America (source and more information).

 

Let’s talk about Kueski now. Kueski is a micro-loan startup from Guadalajara founded by Adalberto Flores and Leonardo de la Cerda in 2012.

Problem and Customer Segment

The problem Kueski is trying to solve is the Mexican population access to credit, especially for those that are unbanked. They decided to focus initially on the small and short personal loans.

How it work?

It’s quite easy; anyone can enter their website and request a loan.
Right now, they have a minimum limit of $1000 pesos (US$47.13) and a maximum of $2000 pesos (US$94.26) for the loans and also a limit of 30 days to pay.
After filling a form, they give you answer in 29 minutes regarding the loan request.

So, what exactly is their value proposition?

Money in developing economies is scarce, so it’s not as easy to get credit in Mexico as it is in the US, for example. Their value proposition is to give an easy and fast way to access credit to anyone, including the 73% of the population that is unbanked and doesn’t have access to this kind of financial services.

Quite an interesting value proposition, right?

But how works their business model works?

Kueski does the underwriting process and lends the money itself, charging an interest rate.

Since they use their own money to lend, makes a lot of sense the debt round of US$ 25MM  they raised (credit line up to US$ 100MM – source). With that money, considering an average loan of $ 1500 pesos (US$ 70.70), they can borrow to more than 350,000 people, not considering taxes and reinvesting the money. That leaves them with a good working capital for the loans.

Their revenue model is an interest rate charged in principal of the loan. Due to the risk profile of this kind of investment, they charge a very high-interest rate, an average of 339.3% per year, which is quite high compared to the average interest rate of a credit card (32% per year). It’s important to remind that less than 13.5% of the population has access to a credit card.

Just making a rough calculation, with an average loan of $1500 pesos (US$ 70.70), even with a default rate of more than 60% they would still have a profit margin higher than 20%. Not bad, right? (I’m not considering tax and fees)
Although I don’t have data from their default rate, I would guess that it would not be so high since the default rate for credit card there is only 5%. Even though, Kueski has still two problems to deal with:

  • They still don’t have a very good historical data to have a more probabilistic idea of their risk;
  • They probably suffer an adverse selection because they will attract as customer people that couldn’t get loans with financial institutions with lower interest rate;

Due to the high-interest rate that they charge and the debt round they raised, I think they have enough room to overcome those challenges. Also, my guess is that their secret sauce is in the underwriting technology that they use.

I would love to understand better how they do it, but I couldn’t find much information about it. What I know is that they use social profiles as input for their underwriting process.

Another interesting side of their business model is how they make loans available for unbanked people. Since most of their clients (my guess) don’t have a bank account, they developed a partnership with a local Bancomer (local bank) and a chain of stores called OXXO, which is a convenient store that has more than 14,000 stores in the country.

Why is Kueski an interesting startup?

Mexico is a market where still most of the population don’t have access to credit. They are using technology and an innovative business model to untap a huge potential market. Also, as Kueski doesn’t have the pressure of banks as competition, this gives room for them to experiment and improve their underwriting process.

What’s next?
My guess is that they got the debt round and set the loan to a small amount to test as much as they can, this ways start to have some historical data and also to improve their underwriting process. It’s important to highlight that the underwriting process and the acquisition strategy are key to their business model to work.

After learning and improving the process, they will probably focus on higher amounts and more long-term loans using technology as a differential.

I don’t think they will try to compete directly with banks since their cost of capital is probably much higher, especially because there is still a huge market to explore.

What do you think? Would you invest in Kueski?

Key Takeaways:

  • Mexico is a hot market for fintech startups;
  • Kueski is targeting a blue ocean market that doesn’t have many other options;
  • Kueski underwriting process is probably what will make or break the company;
  • There is still room in the market for Kueski to target larger and longer loans; 

The Demoday is dead, long live the Demoday

The Demoday is dead, long live the Demoday

What there is in for me:

  • Why Demodays aren’t working anymore?
  • How Wayra Brazil improved its Demoday format and achieved great results
  • What others startupa accelerators are doing?

In 2014, our team at Wayra Brazil was struggling with the limited results in our last Demoday. Wayra Brazil, as most startup accelerator, had at the end of its acceleration period an event to present its accelerated startups to investors and the market.

To contextualize, in Brazil, we were having a boom of startup accelerators, leading to a boom also in Demodays. Most of them were quite similar, a big event where startups pitched 5-10 minutes to an audience of around 100 people composed of venture capitalists, angels investors, press, partners (lawyers, accountant…), other accelerators, and other startups. After the pitch session, there was some moment to socialize, especially for the entrepreneurs to talk with the investors, while having food and drinks.

It was a big event, therefore was not only expensive but also a burden to organize it.

Our team decided to analyze the problems and propose improvements to this “traditional” format. As we always ask our startups to talk to their potential clients to understand their problems and perspective, we started by talking with our clients: Wayra’s startups, angel investors, and venture capitalist.

Talking with entrepreneurs, we understood better many of the challenges they faced and also asked for ways to improve. The main problems were:

– They had a lot of pressure to do the perfect pitch in 5-10 minutes in front of a big audience;
– They didn’t want to open all their numbers since there were non-investor people, press, and might even have competitors;
– They also had trouble to talk with the investors after the pitch session since the event was crowded, and investors were always stopped by someone;

Talking with the investors, we discovered more problems.

  • The partners in the VC funds didn’t want to participate in Demodays anymore because they couldn’t talk with the entrepreneurs, and startups didn’t present the important numbers. So they sent their analysts which didn’t have the same view and decision power;
  • Investors agenda, especially partners, are really complicated with many travels out of the town;
  • Investors started to see the Demodays as a networking event, instead of a significant deal flow event;

In summary, Demodays were starting to become more of a party than a fundraising event, which, of course, wasn’t what we wanted.

Working with those problems and the ideas investors and entrepreneurs told us, we began to brainstorm how we could improve the Demoday and achieve our goal of increasing the number and the volume of investment in our startups.

After a couple of days discussing, we decided to not only change some things of the Demoday, instead to restructure it. We decided to focus on improving the connection between the entrepreneurs and the investors. That is when we came up with the concept of the Demoweek. Here follow the main changes:

  • The event would be only to investors (angels investors and venture capitalist). If you’re not an investor, sorry but you’re not invited;
  • Instead of a big event for many people, we decided to make it more like a business meeting. The entrepreneurs would have 20 minutes with an audience of no more than 15 investors, who could ask any question at any time;
  • The Demoweek would be (surprise) a week long, giving more schedule options to the partners of the funds to participate. The investors would be divided into small groups to interact better with the entrepreneurs;
  • Each day 8 startups would pitch during the morning organized by the amount they were raising. So we had different days for angel investors, seed investors, Series A, and Series B, making it more straightforward for the investors;
  • Each day after the pitch session, we would offer lunch to the investors and entrepreneurs, giving more opportunity for interaction between the investors and the entrepreneurs;
  • Not all graduating startups were presenting, only startups that were performing and that were raising capital presenting. Also, they could be from any previous batch;

With all those changes, we had incredible results in our first Demoweek. The entrepreneurs and the investors loved the new format. More important; we increased the number of investments in our startups.

We achieved all this while lowering the cost and burden to organize the event. After our first experience, it was settle, our Demoday from that day on, would not be a Demoday, but a Demoweek.

We’re not the only ones to realize the problems of the Demodays, some of other Wayras were trying different formats to improve the outcome.

I know other formats from different accelerators that doing interesting things to solve those problems

One of those accelerators is Techstars Chicago, which has two separate Demodays. The first one happens in the morning only for important investors, where they put all the startups to pitch at the same time to different investors, one at a time, and then the startups rotate to pitch to another investor. The second is in the afternoon and is a bigger event open to the other parties in the community, more similar to the “traditional” Demoday.

The Demodays as we know are with their days counted; new formats will appear to solve the problems listed above and also to adapt to local ecosystems.

I would love to hear your experience with Demoday. How did you think they could be improved? Which other formats did you see and enjoyed?

Key Takeaways:

  • The Demoday format has many problems that some accelerators are trying to solve
  • Dare to think outside of the box, don’t be stuck with a traditional format if it’s not working for you
  • There isn’t a one size fits all for the Demodays, 
  • Always get your customer perspective of a problem before coming up with a solution