KAVAK, ONE MEXICAN Startup offers an elegant solution to a glaring problem: buying a used car in a market that is both one of the largest and most informal used car markets in the world. Few buyers trust the seller’s assessment of the quality of the goods. Few sellers trust the buyer to spit out the money. Transactions are often about “meeting someone in a shop around the corner and seeing how things are going,†says Alejandro Guerra, general manager of Kavak in Mexico. The Kavak app allows people to buy and sell cars, with the company acting as a trusted intermediary.
Kavak, which raised $ 700 million in a $ 8.7 billion financing round last month, is part of a startup explosion in Mexico. Since the company became the first Mexican startup to be valued at more than $ 1 billion last year, three more such “unicorns” have emerged. So far, unlisted Mexican tech companies have raised nearly $ 3 billion this year, roughly the same as in the past nine years combined (see chart).
Mexico’s 126 million people are, on average, young and almost in the upper middle income bracket. According to Newzoo, a research company, around 54% own a smartphone, a slightly higher percentage than among similarly novelty-loving Brazilians. Mexico is one of the five largest markets for tech stars like Uber in ride hailing or Spotify in music streaming. It’s great fun for Rappi, a Colombian food delivery company. Until recently, however, local founders struggled to make a name for themselves.
Much of this is due to a lack of funds. Mexican entrepreneurs had to make do with local venture capitalists with comparatively small pockets. That started to change in 2019 when SoftBank launched a Latin America fund. In September, the spending-free Japanese technology investment group announced a second fund of $ 3 billion. Others have amassed, including Sea, a Singaporean tech company, Founders Fund, a prominent venture capital in Silicon Valley (VC) and Tiger Global, an aggressive New York City hedge fund that recently launched the VC World.
This money goes to local companies that, like Kavak, solve what Philipp Haugwitz of McKinsey, a consulting firm, calls “pain points†in Mexico – of which there are many, from terrible traffic to a clumsy financial sector. Since only one in three Mexicans has a bank account, loans are difficult to get and too many companies only have cash, fintech startups in particular thrive, partly thanks to a fintech law from 2018. Fintech radar, an industry newsletter, Mexico now has more fintechs than Brazil, the historic center of Latin American companies. Albo, a purely digital “neobankâ€, makes setting up an account easy. Clip offers credit card readers for smartphones. GBM gives loans to smaller businesses with no credit history. Kavak helps fund transactions on its platform.
Obstacles remain. Like many startups, Mexican companies face a hazy road to profitability. Dealing with red tape is a nightmare; a transaction in Mexico can take Kavak days to process, compared to less than 40 minutes in Brazil. But investors are optimistic. Marcelo Claure, head of SoftBank’s Latin America Fund, describes Mexico as “the land of opportunity”. It has helped his fund’s returns outperform all other regions, he says. And what works in Mexico can also work in other emerging markets. Kavak, who expanded into Argentina last year and Brazil this year, now has its eye on those across the Pacific and Atlantic. â–
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This article appeared in the business section of the print edition under the heading “The Mexican Wave”
