Episode 02: The business of 'exceptional outcomes' in Latin America

October 7, 2020
IFC talks to Santiago Zavala about his journey to becoming an investor focused on Latin American start-ups and why other venture capital investors should put the region on their radar.

Subscribe & Listen


IFC talks to Santiago Zavala about his journey to becoming an investor focused on Latin American start-ups and why other venture capital investors should put the region on their radar.

When he started a guitar-related online forum in the early 2000s, Zavala didn’t expect to find himself where he is today. Although he still actively codes, he’s now widely known as one of the main community builders and investors in Spanish-speaking Latin America. Together with his team, the 34-year-old runs the 500 Luchadores funds and is a partner of 500 Startups. In this episode, he speaks to Creating Markets about the potential of Latin American markets.

To learn more about Latin America's private sector, read: 

Venture Capital Funds Adjust Investment Strategies

Accelerating Latin America’s Tech Start-ups


Santiago Zavala (500 Luchadores): There's a part of the world that has roughly 6 percent of the population of the world that has been very underinvested by venture capital, but has every indicator to prove that in the next five or ten years, it’s going to achieve that priority and be discovered. 

So from my point of view, the pitch to international investors is: ‘Hey, you should come now before it's fully discovered by everyone else.’ 

Jasmin Bauomy (host) This is Creating Markets, the show where we meet investors, entrepreneurs, and other people from the private sector to talk about the investments and opportunities in emerging markets. And I'm your host, Jasmin Bauomy. 

If you're someone who follows business news, you may have come across reports where people talk about the growing interest in Latin American markets.

News clip 1: International investment in Latin American start-ups has more than doubled since 2013.

News clip 2: But this isn't Silicon Valley. It's Guadalajara, Mexico. The birthplace of tequila and mariachi is now reinventing itself as a Latin American tech capital. 

 JB: Today on the show, we're talking about how a geeky kid in Mexico started a guitar-related online forum in the early 2000s, and has now become one of the main community builders and investors in Spanish-speaking Latin America.

Santiago Zavala truly believes in Latin America's potential. He's 34 and runs the 500 Luchadores fund. 

SZ: My name is Santiago Zavala. I’m a partner at 500 Startups looking at the Spanish-speaking Latin American region. 

I've been doing this since 2013 with 500 [Startups], and I started two years before that on my own.

I personally had a front row seat to the start-up ecosystem growing in the region, and I feel, just being part of it and connecting with people, would be the main thing people know me for. 

JB: I called up Santiago in Mexico City, and we talked about his journey as an investor, but also about the investment opportunities in Latin America these days. 

Santiago's origin story is actually really, really fascinating. Santiago and his brother started coding when they were around 10or 11years old.

At that same time, they were living in an entrepreneurs’ household, because both their father and their mother had been building technology companies since the 1970s.

SZ: Some of the companies that my father decided to start at some point, they started in the living room. I got to see the early days of projects and ideas. The entrepreneur journey always starts with a couple of people just chatting and having dreams and ideas. It's almost like a joke saying: ‘Oh, we could do this.’

And then it's suddenly: ‘Oh, we're kind of doing this.’ And then it's: ‘Oh, we're actually doing this.’

I also got to see the opposite of that. I got to see, a couple of times, companies with 100, 200 employees. And suddenly things didn't work out. Suddenly it was: how do we lay people off? And how do we close this down?

In general, I can remember all my life, the economy of the family was very tied to how things were going for those companies that my father and my mother were doing. And the other big part of it is that all the companies that my father was doing were mostly technology. 

So, we started learning how to build a small computer. I started coding really early and I started also to be connected to the internet. And it was first just HTML, right? Static websites. 

JB: Was that still with the dial up? With the doo-doo-doo? 

SZ: Yes. So, right after that we were in a situation where we wanted to play guitar. 

And there were all these tabs that you could get, which are these instructions of how to play a song. But those are made by other people and sometimes they are incorrect. 

We wanted to host a website that had those [tabs]. We wanted to have a comment section so that we could say: Oh, this one is alright, or this one doesn't work. 

I was lucky enough to find an open source project. So I downloaded that and I ran it through my computer. And suddenly we had a community, right? We started to invite people. And we hosted this on a server in my room with two dial-up connections.

And we ended up having millions of visits on that website.

JB: It all started with guitar content and then quickly a community began to grow. And that community started discussing everything from music to politics, and of course, technology.

SZ: That was my first real entrepreneur experience. We started to grow a lot. We had a lot of traction at that point. But yeah, it ended up dying five years later. It's kind of a super interesting story.

The reason it failed was because we wanted to monetize it. Finally, we wanted to monetize it. And we felt the advertising money was in print media.

So, we started a magazine with content from the website, but it was hard to try to do two things at once and we ended up failing. 

JB: That is such a cool story. Okay. So I'm thinking of kids starting a forum. That kind of fizzles out. Then, you guys wanted to start a magazine and that didn't quite work out. But a kid doesn't wake up and wants to be a VC investor, you know? Nobody wants to be a VC. How did that happen? 

SZ: Right. The next big one is that my father, he ends up actually partnering with the Mexican government and the US government to go to Silicon Valley, to open an accelerator for Mexican companies to go to the US and learn how to do businesses over there. So my mother and my father moved to San Jose, California.

They get an office in the Bay Area, and they start doing this. I went every summer. I started to get connected with different people in the area. And it was not only me, there were a whole bunch of other Mexicans who were spending a lot of time in the Bay Area, trying to get connected.

JB: Getting involved with the Silicon Valley folks was chapter two of Santiago's journey. And during his many visits to the San Francisco Bay Area, he met someone who would become his business partner, his mentor, and kind of a cheerleader. His name was David Weekly. And David was the organizer of really popular hackathons.

Basically hackathons are bigger get-togethers for developers mainly, who'd come up with unconventional ways to solve a problem. Or just unconventional ways to use a certain platform. And Santiago was so inspired by this event that he asked David if maybe he could come and start something like that in Mexico.

But instead David suggested.. 

SZ: He said: “Wait, I know someone who would be extremely passionate, who would be perfect to do this in Mexico. He has everything that he needs and he can just do it.” And I'm like, “Who? Just point me to that person and I'll help that person.” Right. And they're like:“No, no, no. You.”

So we just came back to Mexico. We started to organize that event. That was 2007. We started the first one in my house with just six people. Five were friends. Well, four were my friends and me, and we had one person come from Twitter; just from seeing the invitation on Twitter. And then what we did was, we just told everyone: Hey, we're going to do the next one in six weeks. If you want to be part of it, let us know. 

JB: So the first event was six people in Santiago's house, but the next one was bigger. And the one after got even bigger and they continued to grow like that. 

I actually found a video that Santiago posted 11 years ago on YouTube. It kind of showed the atmosphere at these events.

The background music says it all. There's rock and metal music in the air and just this atmosphere of excitement. And so, universities started hosting them. People started giving them food sponsorships and word spread to the US. And a bunch of industry folks from the US decided to attend one of these events and come see what's actually going on in Mexico.

SZ: It was amazing. We spent the whole weekend with them. Some of these were the early employees of Twitter. There were people from Google, from NASA. We had this super inspiration, and it's always important for me to remember that weekend because we had one of the first engineers from Twitter.

Right. And this was back in 2006, Twitter was starting to be a thing. And we didn't know if we're good at doing technology and websites and applications, or if we're just really crappy. Right? It was really hard to compare our output. We saw these huge start-ups and we knew we were not there.

So obviously we're not world class in a way, but of course we didn't also have their resources, and the time, and the people to do those kinds of things. So it was super interesting for us to just spend a weekend coding with these same people and notice that they have the same access to the same computers.

They use the same software. They have the same time. And when you gave them 12 hours to do something, they did something very similar to what we're doing in 12 hours. So it kind of broke a limitation that we had in our minds that we were not capable of doing bigger things. 

JB: And this network of developers and aspiring entrepreneurs grew a lot during that time.

And at the end of the day, he ended up working for a start-up in the San Francisco Bay Area for about a year and a half. And that's where he also first witnessed which start-ups did really well, which ones made it big, and which ones failed. At that same time in Mexico, the hackathons had spread across 16 cities.

And so Santiago and his friends started wondering..

SZ: There’s clearly talent and there is clearly passion, but there's no start-ups coming out of it. What's going on? And in our mind at the moment, we felt that the reason was because there was no capital. And, if people invested in these teams and they had a little bit more flexibility, a little bit of runway, then they could go and do it.

JB: That was it. Young Mexican developers didn't come out of universities with massive student loan debt, like their American counterparts, for example. However, more American folks were taking the risk to start their own companies. 

SZ: How can we get in a situation where it makes sense to take that risk?

So we decided to solve that initially with capital. But we kind of understood that it was just building a whole ecosystem and asset class of different situations that would allow you to be in a position to be able to create start-ups.

JB: And so together with three friends among them, David Weekly, Santiago decided to start a fund.

SZ: We decided, let's go and raise capital. And we'll try to deploy that capital into some Mexican start-ups. We as entrepreneurs wanted this to exist for us. And if no one builds it, then it's never going to exist. So we called it Mexican.VC. We raised $250,000. 500 Startups was one of the first investors in that vehicle.

And we just went and did that. Fast forwarding, we ended up joining 500 Startups in 2013. We raised $3.2 million with them together. We invested that into 80 companies. 

JB: Almost a decade after creating his first fund, Santiago is now working on his fourth fund and he's invested in more than 200 companies overall. 

SZ: It’s been a journey, for sure. There's been a lot of lessons learned, and of course, a lot of mistakes and things that we just didn't know how to do. And we had to improvise and slowly kind of build the capabilities. 

JB: Okay. So all of this sounds like a huge amount of work, and you already kind of mentioned that there were lots of ups and downs.

So I was just wondering if there was ever a moment where you thought you might just quit? Where you thought I just can't do this anymore? 

SZ: Yeah, I feel like there's been five or ten of those. So, that would make it a once-a-year kind of situation.

One of the advantages of building funds as a business is that they're extremely, extremely, extremely hard to create. But because they are so hard to create, as many other things, they have the same property of being hard to destroy. 

So, when you have those very crazy moments and the world is ending in front of you, everything is complicated. You're thinking everything is going to break because of this. The next day you'll wake up and you realize, you still have a responsibility for many years for your fund management and you can’t run from it. 

For me, I have such a high responsibility to both our investors and our portfolio founders. It just takes maybe a couple of days to look at yourself in the mirror and be like: You committed to this. This is what you do. 

So I think, that's what keeps me going and every fund that we add to the—to at least every company that we invest in, every investor that agrees to invest in us—it just kind of makes that stronger and stronger.

And then, I feel the other very big part of this is just the team. We built a culture and a resilience. I remember at some point being alone with those feelings and situations. And now you have all these different people that are good at helping you manage that.

So in a way, the weight is not only on your shoulders. There's other people to carry it with you. And that helps a lot. 

JB: Right now, Santiago is working on the third 500 Luchadores fund. And overall, Santiago says 50 percent of the investments were made inside Mexico. 

SZ:. The rest of our activities are heavily concentrated in Colombia, Argentina, Chile, and Peru.

But we are also looking at Central America and some of the other countries in South America. 

Some of these are frontier markets that I feel are extremely important that we continue to incentivize and be part of that. So when I think about where Mexico was in 2011—I had been to Bolivia for example, and I've been able to hear from some start-ups, and the local ecosystem was telling me: ‘Hey, sorry that these are super early. And, it might not be like the kind of companies you are used to seeing, but any feedback that you give them would be great.’

And then I go and I listen to the companies and they are way better than what we were doing in 2011. So in a way for us to be there, it kind of reminds me of this situation I mentioned on that weekend, right? When we had the people from the US come here. And we were like: ‘Hey, if they can do that in 12 hours, that's what we're doing. So, we have the same capabilities.’

From our perspective, it’s also going to be a really good business if we go and deploy capital there, because we've already learned how the ecosystems grow when you start to invest in the payments ecosystem, and you have some logistics and you start to see the eCommerce, and you start to see on-demand companies doing deliveries and everything.

And suddenly, you start to see the bar rising and rising. So it would be really good to start planting some of those seeds. So I'll give you a super interesting number for that. 

JB: As we're speaking, Santiago starts digging through his notes and he starts telling me about the number of start-ups that applied for investments from his latest fund.

SZ: So for the last application batch that we had, we reviewed 1,957 companies out of the region. 274 of those were from either Central America or some of these other countries that I mentioned, like Bolivia, Ecuador, Venezuela, Uruguay and Paraguay.

So in a way, it's really exciting for me to know that 15 percent of the companies that we're looking at are coming from these ecosystems. That every time that we go and invest in one of these, we're going to be moving the needle a lot in how even that ecosystem perceives their capabilities and, if we're able to invest in some of those first top performing companies.

One thing that I always like to remind myself of is: we're in the business of finding exceptional outcomes, right? And those exceptional outcomes are usually going to come because they have different ingredients. If they have the same ingredients, then the outcome is probably going to be the same as most other things that are already in that space.

JB: If you had, if you had to, and I would force you to put 80 percent of your funds towards a certain industry and bet on that right now across the Latin American continent, what would you go for?

SZ: That's a tough one because part of what we do is high diversification. I feel if you ask this to other investors, they would instantly jump to FinTech.

And the reason for that is, it's a big market. There are a lot of co-investors. Some of our top companies are in the FinTech space. So ourselves, we've seen that value. It's going to be amazing. So, I would definitely build on top of that. I would put my capital either in SaaS [Software as a Service] or e-commerce, and other situations that are just going to be huge because the FinTech space is kind of solved.

So that's it. I mean, on a personal level, I feel education is going to be huge. We have a whole bunch of companies in that space and I feel like the mixture of education and employability is kind of the future of jobs. 

So that it would be the other one that I would definitely look at as something that is not only going to be hugely successful as a business, but also has huge impact and is also hugely required.

JB: So since you mentioned that those types of products are required, I kind of do have to address the elephant in the room, which is, of course, the COVID-19 pandemic. So would you say that there's a new normal right now that has established itself?

SZ: There's still a lot of changes going on. COVID has definitely been a topic of conversation for a lot of people. But I feel when you zoom into the start-up world and you talk with the people who are just making it happen, I feel right now, things are working.

If you can think of one kind of personin the world who would be fast at adapting and try to use any crisis as an opportunity, of course it has to be the entrepreneur community. So I think right now, what's really kind of on our minds in general is how can we continue to have access to capital.

We definitely need to continue to be ambitious and try to find great investors globally and locally. I mean, depending on how you slice and dice the population and the GDP and other stuff, the whole pitch would be this:

There's a part of the world that has roughly 6 percent of the population of the world that has been very underinvested by venture capital, but has every indicator to prove that in the next five or ten years, it’s going to achieve that priority and be discovered. 

So from my point of view, the pitch to international investors is like: ‘Hey, you should come now before it's fully discovered by everyone else.’

JB: And that's it for this episode of Creating Markets, the 500 Luchadorers II fund is supported by the IFC. 

This episode was produced by the IFC comms team with the help of Kelly Alderson, Darcy Crowe, Alison Buckholtz and John Donnelly. Sound editing by Nicholas Alexander. And I'm your host Jasmin Bauomy - and I'll talk to you again soon.