FinTech Collective: the Mexico Cohort

FinTech Collective is a global venture capital firm backing entrepreneurs who are rewiring how money moves through the world. Founded in 2012, our investment trajectory over Funds I, II, and III reflects this powerful mission. Backed by institutional capital and with a deep operating history as entrepreneurs, we are energized to deepen this commitment as we deploy capital from our $150m+ early-stage fund over the coming years. Through our 44 portfolio companies, we have built a worldwide footprint over the past decade, across both developed and emerging markets.

It is impossible to overlook the fact that approximately a billion individuals in emerging markets had their first formal financial services relationship established over the period in which we’ve existed as a firm. As of 2017, ~30% of the global adult population remained “unbanked”[i]. While the definition of this term is open to interpretation, other metrics of financial inclusion reinforce a similar message across emerging markets. The opportunity for fintech to attack these gaps is clear, and the process underway. In a pandemic stricken world where hundreds of millions of people are facing greater financing instability, we are convinced that financial technology can accelerate the emergence of a spending middle class previously marginalized by traditional financial systems.

Within the vast constellation of emerging markets, our Emerging Cities thesis focuses on four metropolitan hubs that are fast becoming magnets for talent and resources, the first ingredients to the development of a formidable entrepreneurial ecosystem. Three of these hubs are in Latin America — Sao Paulo, Bogotá and Mexico City — and one in Africa — Lagos.

Since our first investment in Africa in 2015, we have looked at emerging markets with patient and keen interest. In Sub Saharan Africa, investments in Migo, WorldCover and Flutterwave served as initial steps, with the latter becoming a breakout company, recognized globally for its role in the secular shift from cash to digital. It announced a $170m raise last week, and is now valued at over $1bn.

In Latin America, we have built a portfolio of eight companies which expand on themes of financial infrastructure, digital banking, software and workflow automation for small businesses and alternative lending. Two are in Brazil (Contabilizei and Rebel), with the latter having announced its merger with Geru this month, to manage a 1.5bn BRL credit portfolio. Minka (whose seed round we led) is in Colombia, and the remaining five are in Mexico (minu, Runa, Oyster, Fondeadora and Oxio).

Mexico is unique in both its stage of development and scale of opportunity. Specifically, we would highlight the following trends:

· Growing connectivity and digitization: with as many as 80 million smartphone users, these handheld devices allow for the delivery of financial services to underserved populations at scale. This reflects a wider trend across the region, since mobile subscriber penetration rates are as high as 70% in Latin America, and expected to increase to about 80% by 2025[ii].

· Favorable regulatory environment: the 2018 Fintech Law is an important regulatory hallmark at the regional level. Though not fully comprehensive in scope, it has arguably encouraged greater competition in the local ecosystem, serving as an example to other Latin American countries.

· High level of urbanization: Latin America is the second most urban region in the world with an extremely high proportion of its citizens living in urban hubs (~80%)[iii]. Mexico City stands out as a rising hub with over 20 million inhabitants, while leveraging its proximity to the United States. The latter is crucial to our investment approach, as it allows us to be “in-region” frequently, serving as an active partner to our portfolio companies.

· Maturing talent pipeline: as early movers have grown up, their talent has begun to filter back into the ecosystem. Linio fed a local “PayPal mafia” type effect, with 10+ offshoots including Kavak, Mercadoni and Petsy. Similarly, top educational institutions such as IPN, Tec de Monterrey and ITAM are becoming incubators for local talent, up-leveling the ecosystem’s technical potential.

· Rising success stories: Mexico City is not yet at the level of Sao Paulo, where PagSeguro and Stone validated the path towards a successful US-based IPO. Nevertheless, it is showing increasing promise. Last September, Kavak was recognized as the first Mexican “unicorn”. With a strong early stage pipeline, foreign growth investors are looking at Mexico with growing focus.

In a digitally turbocharged ecosystem, whose dynamism grows by the day, we see opportunity for our current cohort of five companies to thrive.

When assessing Mexico’s 4 million small businesses (SMBs) — which constitute the backbone of its workforce — it’s evident that the majority operate on antiquated, legacy systems. We thus see software and workflow automation tools as promising productivity boosters.

· Runa (invested: Q2 2018) offers a cloud-based payroll and HR software solution designed and built for these Excel-reliant SMBs. For many, its product is the third software installed. Since we invested in the seed round, Runa raised a Series A led by Ribbit Capital in the summer of 2019.

· Oyster (invested: Q1 2020) — whose $14m seed round was the largest for this stage in LatAm — is building a digital financial institution to address the banking and credit needs of this population. Though Mexico’s SMBs generate 42% of the country’s GDP, over 75% operate informally[iv]. Oyster is thus paving the way to become a holistic financial institution for the region’s SMBs.

From a consumer standpoint, millions of people in Mexico are establishing their first formal financial relationships, having been historically sidelined by limited digital offerings and rigid underwriting.

· Fondeadora (invested: Q3 2020) is a mobile-only bank building an elegant, savings-focused mobile application that allows people to send, spend and store money seamlessly. The company addresses a massive market need left by traditional banks, as Mexico has nearly 60 million unbanked people above the age of 15[v], with another 24 million underbanked[vi]. Their $14 million Series A marked Gradient Ventures’ — Google’s AI focused VC fund — first investment in Latin America. This week they announced a $14m extension, raising the total round size to $28m.

Equally important to the socioeconomic advancement of individuals is consistent, affordable mobile connectivity, and mobile data is currently too expensive for most buyers in Mexico.

· Oxio (invested: Q3 2018) is redefining this reality via a cloud-based platform that allows any brand or enterprise to become a mobile virtual network operator (MVNO), thereby enabling mobile connectivity for its users. Though US based, Oxio has focused on Mexico as a primary commercial market. After raising a $12 million Series A last November, led by Monashees and Atlántico, Oxio is deepening its efforts in the Mexican market this year.

If access to a bank account and mobile connectivity are crucial, liquidity is certainly a priority in a country where 75% of workers live paycheck to paycheck[vii], and only ~15% save in a formal manner[viii]. A recent study by E&Y revealed that Mexico tops the list of major economies for individuals unable to fund an emergency (~69%, in comparison to 26% in the US or 18% in the UK)[ix]. Our fifth investment in Mexico– whose $14m Series A was announced this month — is precisely tackling this issue.

· minu is building an employee-focused financial wellness platform, offering 24x7 instant access to earned wages for a fixed withdrawal fee. With 100+ large enterprise clients across the public and private sectors, and an 18-times increase in the number of transactions last year, it has emerged as the market leader in Mexico, well positioned to build up a broader suite of financial products for this demographic. We are thrilled to join Minu’s board and help reduce the daily financial stress hindering millions of Mexican workers.

In a previous post, we mentioned that fintech companies had been summoned to play an important role in ensuring the financial recovery of Latin America. As the pandemic began to unfold and chaos seemed to take over last spring, these startups faced a juncture of sorts, capable of leveraging unique positioning to extend flexible financing or leverage digital solutions to mobilize stagnant economies in unprecedentedly agile ways. A year (and two investments) later, we are still in the early innings of this process.

We look forward to remaining active in Mexico and throughout the wider region, supporting entrepreneurs and ventures reimagining the better financial future that millions deserve.

[i] The World Bank Group. The Global Findex Database. 2017.

[ii] Ibid.

[iii] United Nations — Department of Economic and Social Affairs. World Urbanization Prospects. May 2018.

[iv] Konfio. Inclusión Financiera.

[v] The World Bank Group. The Global Findex Database. 2017.

[vi] INEGI. Encuesta Nacional de Inclusión Financiera, Presentación de resultados. 2018.

[vii] Ibid.

[viii] El Economista. Solo 15% de los mexicanos ahorra de manera formal. October 2018.

[ix] Ernst & Young. On-Demand Pay: Payroll that works for all. September 2020.

Investor @FinTech Collective * Harvard MPA/Wharton MBA

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