Invest Like the Best with Patrick O'Shaughnessy - Sebastian Kanovich - Powering Emerging Markets Payments - [Founder’s Field Guide, EP. 56]

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Starting point is 00:00:28 Founders Field Guide listeners get 20% off their first six months, so please learn more at Pilot.com slash founders. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types.

Starting point is 00:00:52 Founders Field Guide is part of the colossus family of podcasts, and you can access all of our podcast, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunosate Asset Management may maintain positions and the securities discussed in

Starting point is 00:01:28 this podcast. My guest today is Sebastian Cannevich, CEO of Payments Company DeLocal. Sebastian founded DeLocal in 2016 to bridge the infrastructure gap between payments in developed and emerging markets. Since then, the initially bootstrapped startup has enabled global merchants like Uber, Spotify, and Google to service billions of emerging market users. And in doing so, DeLocal has created $10 billion of equity market value, having IPOed last year. Our discussion covers DeLocals' Playbook for facilitating payments in emerging countries. what Sebastian's learned about great API building and how he challenges himself to improve personally. Please enjoy my conversation with Sebastian Canovich.

Starting point is 00:02:11 Sebastian, I've been really looking forward to this conversation because I am so fascinated with the world of payments. It's this massive thing that everybody uses every day that is unspeakably complex in its guts. And in a world that's increasingly global, DeLocal sits in a fascinating position in this world. So I think the right place to begin would actually be with the present day and survey. your take on global payments. What is interesting about that system to you today and the role that you play in it? First of all, thanks very much for having me.

Starting point is 00:02:41 It's great to be here. Payments has become exciting. It wasn't this way when we started. From day one, I always felt the same. Payments, it's not rocket science by no means, but it works, but it's sometimes broken on the edges. And what we've seen is that things that people give for granted in places like the US, Europe, even China,

Starting point is 00:02:57 that a user can go and buy from a company and that company can go and pay from that user. it's not the case when you are sitting in Nigeria or when you're sitting in India or when you're sitting in Brazil. So if anything, we've seen that people are demanding more and more use cases that require international payments, but those payments are completely broken. And they're not broken because there's something fundamentally broken about it. It's more about building the infrastructure, making sure that those pipes connect to each other. The other thing we've seen more and more is that payments are a very local trend. So if you are a user sitting in South Africa, you have a very different behavior from the user sitting in Mexico or from the user sitting in India.

Starting point is 00:03:31 And if anything, we are seeing that becoming more and more localized. Well, that's great news for the user, because now I can go and pay with whatever payment method I want. It's very challenging from a merchant, from a company perspective, because sadly you need to accept hundreds, if not thousands of payment methods. So what we've seen, what gets me excited and what keeps me going is there's a problem that shouldn't be broken fundamentally, but it is today. What gets me excited is whenever we fly into a new country and that has happened multiple times,

Starting point is 00:03:56 we say, wow, this is a really complex. There's multiple frictions here. We should be solving it. Talk me through an example of a country, what happens when you show up, what you typically see, and the playbook that you've created to facilitate lower friction payments in a given country. It sounds like it's idiosyncratic. Each country is a little different, but give us a sense of what it feels like to approach somewhere that isn't yet where it could be and what you do to get it there.

Starting point is 00:04:22 Typically, when you fly into a new place, the first thing you'll see that people pay with whatever local payment method they decided that it's relevant. In the case for India, when I was first there, it was cash, then it became, UPI, which is a state back payment method. And typically, you'll see that infrastructure for local use cases works relatively well. If you are a kiosk and you want to accept UPI, things work relatively okay. If you're a local company and you want to accept UPI, things work. The challenge starts when your user or you're sitting in India and you want to buy from Spotify

Starting point is 00:04:48 or from Netflix or from Google. That's where the friction starts because suddenly those funds need to be expatriated, to California, to Europe, to China, or the opposite flow to payout into a UPI account. All those steps, none of them should be complex on their own, add friction. So what we do is we make sure that infrastructure is there. Fundamentally, we want to make sure that, independently of where the user is sitting, our merchants can be able to accept and disperse payments. And that should be absolutely transparent.

Starting point is 00:05:15 What we do at the local, it's generally building infrastructure. That's what gets us excited in the sense that we have no agenda around the user saying, I bought from the local. We want the user to say, I had a great payments experience in Amazon. And if we are powering that, that's great news for us. We know how it should look and when it works okay. We know when we go into the market, what's broken, and we are trying to fill the gaps.

Starting point is 00:05:35 If payment methods do not support recurring, which is something we see again and again, this idea of being able to charge the same user systematic. That needs to be fixed. That kills the whole business model for some merchants. So how do we fix those things? Tax reporting, super complex in some of these countries. How do we integrate to the tax authorities

Starting point is 00:05:50 to make sure that the right taxes are being paid automatically? Expatration of funds. How do we deal with effects in countries which are extremely complex in terms of the currency controls. We are looking to have the building blocks that make commerce happen, as it should in the US or in Europe or in China. Is it convenient to think about what you're building at the top level as a standard protocol? Any country, your mission would be to roll the stream of information that starts in that

Starting point is 00:06:15 local example up to a standard that you've created so that you're a protocol-like business? We are an API business. What we offer our merchants is the ability of navigating all of those complexities under one API. I don't see ourselves as a protocol in the sense that for a protocol, you would assume that there's adoption without the protocol doing any active efforts. Or you set the standard and then the community built it. That's not the case for us. We need to go and build the pipes into all of these countries. But yes, fundamentally, we want to add a level of abstraction from a technology standpoint where no matter where these users are sitting, companies should be able to reach them.

Starting point is 00:06:48 The only caveat is that us as a company at the local only get excited for emerging markets. We are looking generally at the places where we think this challenge is the most relevant. So you see the local in Latin America, which is where we started. You'll see us investing really heavy in Africa, in Southeast Asia, in India, because those are typically the places where this problem we see, it's more important and it's more complex. What companies handle the solution like you're handling it outside of emerging markets? And why didn't those companies go down into the emerging market, given how massive that space is? Companies like Aidian or Stripe will be serving a very similar role.

Starting point is 00:07:23 but in Western Europe or in the US. Why they haven't gone to emerging markets, I think it's a great question for them. We do see them coming more and more aggressively. I think there's a few differentiators. One, it's culture. And I know this sounds super basic, but we started this company out of Uruguay

Starting point is 00:07:37 processing payments in Brazil. That has defined two key things. Number one, we come from emerging markets. We were born in countries where things are complex and are tough to navigate. But number two, we never did business in our home country. We didn't operate our business out of Uruguay. The first country we launched was Brazil.

Starting point is 00:07:51 So that got the company very used to this idea of becoming local in a place where we weren't born. That's the first differentiator. The second one is a technology. As I was mentioning before, payments is not rocket science. We generally don't see it that way. But building technology for payments in emerging market takes time and takes grit. It's not easy.

Starting point is 00:08:08 Regulatory frameworks are complex. Payment methods are sometimes outdated. So it takes a lot of investment, a lot of commitment to these problems. Sometimes when we first go to a market, countries like Bangladesh. First time we analyzed Bangladesh, we said it's really, really, really complex. There's two possibilities. to say this is impossible. Let's go for Germany that it's easier. The other answer, which is the one we are committed to it, this is a nightmare. Let's go fix it. That process might take three months or might

Starting point is 00:08:33 take three years, like the case of Bangladesh. And we know that we are going to see the payoff, hopefully, in five years to come, because that's a very early economy. But we think that the infrastructure needs to be laid. This is not a problem to tackle as a me-to or as something else. This needs to be your DNA if you want to have a chance of being successful. And even if you commit entirely to the problem, you'll know that it's a very complex one and it'll still take lots of time on investment. Can you walk us through one technical infrastructure example of literally what you built in a specific country so that I can get a sense starting with that UPI or you pick the starting point? If I'm trying to flow up through your technology infrastructure into a recurring payment to Spotify,

Starting point is 00:09:11 I would love to understand in as much details you can provide the literal steps or the infrastructure that you've built to enable that thing. Let's use the Google example in Brazil. Google wants to collect from their users for ads, cloud, YouTube, and play. And they want to be able to accept local credit cards. So locally acquired credit cards. They want to be able to offer installments. They want to offer a thing called DPEX, which is a central bank-sponsored payment method,

Starting point is 00:09:35 and they want to offer bullet. Bullet is a cash method where you go and you pay in the counter with cash. What we do is we give Google one single access point, one single API. I will tell them, you integrate into this API and you're going to have access to. Your user wants to pay with installments. we are going to route that transaction dynamically to the acquire. And we're going to have the ability of preventing fraud because we understand the dynamics behind that. We're also going to be able to navigate that information and send it to the tax authority

Starting point is 00:09:58 to understand exactly how much tax that given transaction needs to be paid. Once that transaction settles, so once a user actually paid, we're going to collect those funds. You're going to get a notification, which is standardized through the API where we're telling you. User A bought their YouTube subscription. They paid 100 BRL. This is how much tax is going to be paid. This is how many dollars you're going to be receiving should you decide to get dollars. This is our fraud screening of that transaction.

Starting point is 00:10:23 The same will happen for every single payment method. So for that credit card transaction, you'll see exactly the same messaging as for the fixed one, as for boleto, installments, and all of that complexity, all of those use cases are captured under this same API. Two more complexities that we capture under our technology, number one is if Google, instead of wanting to collect from a user will be dispersing to our YouTube creator, the same logic applies. So instead of them calling up collection, they call it a

Starting point is 00:10:47 what we call payouts, and essentially they are sending the funds through the banking system in this example in Brazil. The other complexity that we also capture under our API is that if that user, instead of sitting in Brazil, it's sitting in Egypt or in Mexico or in Chile, exactly the same technology will apply. So there's no additional integration work whatsoever from a Google Sandpit. All they need to do is change the configuration. Instead of putting VR, they'll say MX for Mexico, and the whole logic will apply to the local

Starting point is 00:11:14 market where they are operating. All of that complexity with right to Astra. How does it feel from the user perspective in the case of a disbursement back from the company? Google's got a board of engineers and not how to use APIs. A consumer just has the way they like to get stuff. Where does it sit? How do you interact with the consumer? Or are you just interacting with the business entity or the government entity that makes

Starting point is 00:11:33 that payment method available in Brazil, for example? Great point. We don't interact with the end user. An easier example of this is we pay out many of the Uber and digital drivers across the emerging markets. Every Wednesday, they'll get the payment. What will happen in behind the scenes is that Uber funded us, so they settled funds into us, and they called an API saying these funds need to go to driver number one, these funds go to driver number two. And the driver will see into the bank account X amount of pesos or dollars or Nairas in their bank account under the Uber name.

Starting point is 00:12:01 So they'll never know that the local was the one pay. In the example of Brazil, you've got this really clean interface from Google's perspective. There's all sorts of complexity in each one of those things is interesting to me. So FX, for example, how are you handling that? Are you effectively doing a trading function to all this? Talk me through like the FX as an example if you're dealing with X number of different currencies and it feels standard to Google. Yes, absolutely.

Starting point is 00:12:24 There's a trading function. So there's two sides to it. One is the ability to expatriate the funds in markets that have capital controls. So Brazil, it's an open market, but there are restrictions in terms of what you can do, depending on the amounts to sell. So for every single transaction, we want to expatriate from Brazil. We need to report that to the central bank. All of that reporting is not automatically.

Starting point is 00:12:43 So once we get that okay, which is done automatically, then we have our own treasury function. Essentially, they bundle the millions of small transactions that we've got. They exchange that into dollars or euros, and they expatriate those funds and settle directly to the global companies wherever they are. The same process happens multiple times a day in every market where we operate. Any given day, we're going to be trading 30 plus currencies multiple times a day to make sure that our merchants are getting their preferred currency in wherever they decide to do so. When you're attacking a country building your business, is it right to think about it like you would have a team that's just dedicated to Brazil because it's so idiosyncratic? So there's a Brazil product team. And that team ultimately has to roll up to the standard that would then pass over to clients via the API.

Starting point is 00:13:25 But everything leading up to that standard is idiosyncratic to the country or do you apply the same team across different countries? We have an expansion team whose sole responsibility whenever we launch a new market, setting up our own entities, hiring our country manager that it's always our first fire. understanding the regulatory framework, understanding what are the payment methods that need to be offered. And once they have that package, we consolidate that into our product. We don't localize our productive. We do have people in products sitting everywhere. But the product team, we do a very adamant effort to make sure that it's one team.

Starting point is 00:13:55 We don't want the local in India to look and feel differently from the local in South Africa or different from the local in Mexico. That's why we insist so much in this idea of one API. One of the challenges payments companies sometimes have is they start to aggregate platforms, one on top of the other. So if you're a global company and you want to operate with them, they tell you, look, if it's Latin America, you have one API. If it's Africa, you have a different one.

Starting point is 00:14:17 If it's Southeast Asia, you'll have a different one. We are obsessed with the idea of making sure that wherever we are doing business, our merchants can navigate. So expansion teams need to make sure that we understand what's going on on the ground, that they set up an entity, they set up the initial operation. And then the operation team kicks in, and they are the ones running the business on a day-to-day basis. You'll see people from the local sitting in India, taking care of the India operation, but everything from a product and technology perspective, it's done from a consolidated standpoint,

Starting point is 00:14:44 because we want to keep that holistic view. If I forced you to retire tomorrow as the CEO and turn into a payments-only early-stage investor, what would be the things that you'd be looking for in other payment companies that would get you excited about their prospective success? This is a new one. I'm not trying to retire. I'm 31, so let's start there. Having said that, if you don't control your technology, you don't have a chance.

Starting point is 00:15:07 So I would be looking at strong technical teams that understand innovation in payments happens right in the middle between the financial world and the technology world. I think that's a lesson that some of the companies we named before and hopefully we as well understand really well. If you're just good at technology, but you don't get to understand the real problems, regulatory frameworks and the reality on the ground, you're going to be a nice technology that knows when it's going to be adopted. If you just understand regulatory frameworks and you understand the financial system, but you're really bad at technology, you're a bank. great, but not what gets me excited. If I were to back a company, I want a company that understands really well

Starting point is 00:15:42 the framework on which they are operating from a traditional perspective, from a regulatory financial perspective, and hopefully they have a technology innovation that helps navigate that. Not technology per se, but something that is really solving a pain point in that sense. Companies that find that balance are the ones that make magic happens for users.

Starting point is 00:15:59 If you look at the innovations that you've seen in payments, it's typically an easier way of getting on board or an easier way to getting a merchant account. Is that crazy to do? Absolutely no. But you require to understand what can be done from a regulatory standpoint and they have a great technology that allows you to power it. That's a switchpot. That's where we want to be. And that's what would get me excited. What have you learned, given how many times you've done it about working with new regulators and regulatory environments? What is excellent to you on your team at dealing with this unique aspect of it, if that's such a key part of success?

Starting point is 00:16:31 To me, the biggest lesson has been the importance of treating regulators as grown-ups that are trying to do the best they can in the markets under the conditions they operate. Sometimes us, from a payment standpoint or from a technology standpoint, we want to move fast. We want everything to be obvious in 30 seconds. We forget that people in the regulatory bodies have a very different set of incentives. They want to understand exactly what is it that it's going to be processed, and making sure that you raise their comfort level and you continue to invest in that education process. It's something that we've learned. In many countries where we operate, we are working with the regulator to build a regulatory framework. This is how a regulatory framework should look for a company like Google.

Starting point is 00:17:11 These are the things you should take care of. This is how you should think of taxes. And I think over time, they get to see us more and more as an enabler. The thing that has happened in the last few years is that some of the merchants for which we process have become ubiquitous in the market where we operate. Users won't live without Facebook or without Google or they'll do WhatsApp messaging and commerce and they'll drive an Uber and they'll get a rapid. All of that complexity exists and regulators understand. So they are more and more open to say, how do we cater for this? How do we

Starting point is 00:17:39 make sure there's a regulatory framework? There's a way for these companies to be able to thrive and us as a regulator to be comfortable. Understanding those two things has been extremely important to us. The trend of globalization or in some cases de-globalization, like if you think about physical supply chain, I think one of the most interesting things happening today, it seems like there is trends physically in de-globalization, more localized supply chains, more concerns over perfectly integrated global system. But it seems like you are enabling more digital globalization, meaning you're serving the Netflix's or the Spotify's or the Googles of the world that effectively are great companies that have customers literally everywhere. And customers want them and they want the

Starting point is 00:18:18 customers. What would you say about that concept of your role or payments role in what I'll call digital globalization and the trends that we may see in the next decade in that area? I'm always worried on overplaying our role. We are a payments company and we build infrastructure. And the great things that are happening in this space are entirely because there's great companies thinking of these markets. The role we have to play is making sure that those opportunities can happen. We are not at merchant ourselves.

Starting point is 00:18:43 We are not here to sell goods to users or to pay out a creator. We do want to make sure that those transactions can happen. What I've seen, and I know there's this whole concept of de-globalization, but we are still seeing that merchants recognize that their feelings, futures are outside of their home countries. We started serving U.S. companies and at some point four years back, I had the chance to go to China and we said, okay, for every Google, there's going to be a counterpart in China, for every Facebook, there's going to be a TikTok, for every Uber, there's going to be a D. Our bet was that both of them would be relevant, but most importantly,

Starting point is 00:19:16 that they would be relevant in the markets where we operate. If you look today at where the growth is coming from a company like DDI, it's coming from Latin America. Today, it's obvious, but four years back was crazy. If you look at Sheein or Shopee, which are retailers, they're killing it all across emerging markets and they're grown like crazy. We do expect U.S. companies to struggle a little bit more in China. We do expect Chinese companies to struggle in the U.S. But we do see them booming in the emerging markets. That's a playing field, if you will. And that's where we're expecting all of their growth to come. One of the things I'm obsessed with with technology is the ways it lowers friction and when you lower friction, the explosion of activity that happens on the back of that.

Starting point is 00:19:56 What are examples that you've seen of that so far with DeLocal? What new activity or new behavior is most interesting, whether it's from the merchant side or the customer side as a result of you creating lower payments friction? On the payout side, we've launched our payouts products, so the ability of a merchant to sell funds to a user when Uber was expanding into Latin America. And essentially, we went with them. They said we have this need to pay out thousands of drivers, banking, system doesn't work. They were sending wires before that cost lots of money and they take

Starting point is 00:20:24 forever to hit the account. So they told us, we need the funds to hit the account every Wednesday in local currency and you cannot miss it. The first week, we did manually. I still remember to this day, we paid 700 Uber drivers in Argentina manually. So that's a very clear or extreme case, if you will, of an infrastructure powering an opportunity. We've launched our issuing product, giving Merchancy, ability to issue cards to their users. And we are seeing crazy adoption in places where we wouldn't have thought of before. We are seeing a lot of traction on the remote work space where more and more people in emerging markets are working for global companies. And one of the things those global companies are trying to do is give their users a financial product, which essentially

Starting point is 00:20:59 is a credit card with their salaries and hopefully some benefits. When we launch issuing, that wasn't the use case we're expecting. That geek economy or remote workers economy has definitely surprised. We learned that whenever the infrastructure is there, new opportunities come up. Kamba, Australian company being extremely successful in India. I would love to tell you, Patrick, that we saw that one coming. But that wasn't part of the plan where we launched. We say, okay, there needs to be an infrastructure into India. Someone is going to use it.

Starting point is 00:21:24 I couldn't have bet that it would be an Australian company. Could you walk me through the business of a payment, like a single payment and understanding how the economics of this work and how much they vary country to country? I'm sending $100 from Uber to Driver 1. What are the cost centers in the intention of Uber having the dollars in their U.S. bank account to getting it to the bank account of the driver wherever it goes? What are the steps and the cost of those steps that are relevant? This is one of the things I like about payments. The unit economics are super simple. For every transaction, there's a cost processing that payment, which essentially

Starting point is 00:21:57 is the funds that get paid to the payment method for doing that service they're offering. If it's a bank transfer, what do we need to pay the bank? If it's a credit card transaction, what do we need to pay the acquires, the issuers, the networks for that payments. So that's what we call cost in our gross profit lane. What are our sources of revenue? Two sources. One, it's a fee that we charge the merchant. They'll pay for every transaction, a percentage fee or a fixed amount depending on the business

Starting point is 00:22:19 case, very similar to what a credit card transaction does. And then there's a second source of revenue which only applies to cross-border transactions, which is the FX spreads. For every FX transaction, we call it FX fee. For us, both of them are interchangeable. For every transaction, if we are going to be collecting BRL or NIDUS, we are going to apply a spread on that transaction. So if you want to take one dollar, there's a fee for processing, there's a fee for effects, those to our two sources of revenue. There's a cost of processing that transaction,

Starting point is 00:22:46 which we call processing costs, and that gets you to our gross profit, which is a clean margin that each transaction provides. At the local, we're always taking a stance that every dollar needs to be processed at a profit. So every single dollar in our platform contributes to that margin. And the reason we've done that is we believe that it's really powerful when your incentives are aligned to your customers. Every morning I receive a report on who did what volumes yesterday. And every time I see a customer doing well, I'm happy because I know that number one means more growth for them, but necessarily, independently of where it is, no matter what's the payment methods, not matter what's a geography, no matter what product, that has contributed to our margin.

Starting point is 00:23:21 Is that controversial, that opinion? Would other investors or operators say that you should operate at a loss in certain segments as a means to accessing higher margin segments? traditionally the banking system or banking products. In many cases, they thought of payments as a lost leader, where we give this for free and we make money on credit or we make money in other places. I think for payments company, it's well understood. There are sometimes challenges in terms of if you're expanding into all these markets, why don't you subsidize the early adoption?

Starting point is 00:23:48 And that's something we are strong against. We want to make sure every business of our stance on their own legs. But most importantly, we don't want to wake up one morning and saying, oh, our merchants is great. We are so sad. We want to avoid that no matter what. From the listener's standpoint, that's never thought about payments, you mentioned the cost center is the processing fee, and that's different at different places. In the digital world, I might think, why isn't that zero? Why is there a cost there? Like, you're just moving bits around.

Starting point is 00:24:12 So what is the source of cost to process a payment or a transaction? I do agree with you that over time, the cost should go down. As fundamentally, there's no reason why there should be a high cost of moving funds around. As you said, these are bits moving from one place to the other. But you also need to think that you need to give an incentive. to the network to operate. If you use a more extreme case of a cash method in Mexico, it's called OXO or in Egypt, it's called Forre. They're operating branches. They need to give an incentive for the cash store to be able to collect and disperse. If you move to that extreme case to a bank account, a bank-to-bank transaction, that cost should

Starting point is 00:24:46 be lower. And when you look at the most innovative stuff, like what's happening with UPI in India or PICS in Brazil, they're following very much the reason in your saying, this shouldn't have a cost. This costs a tax on the society overall, and we should bring it down. And we're seeing that. Our cost of processing payments continues to go down because the nature of the business requires it to be the way. If you think about currencies as a key variable in the DeLocal Business equation, obviously you're dealing with lots of different currencies. What variables have you come to be interested in or appreciate when you're approaching a new currency? What matters in a currency? What do you think about?

Starting point is 00:25:20 We are not currency traders. So we are not taking positions in foreign currencies. We don't want to guess or bet what currency is going to go up and what's going to go down. That's not our business by any means. We are purely transactional business where we want to make sure that transactions are flowing. And therefore, the key factor for us is liquidity. It's the ability of exchanging that given currency to dollars or euros and back. That's where we focus, making sure that if we collected pesos, we can get dollars. And if we have dollars, we can get Nairas or Reales or whatever it is that we are trading.

Starting point is 00:25:50 We don't take positions. We don't try to guess what's going to happen next week. Every day we collect funds in local currency and we expatriate. every day we collect dollars and we reap a trade and that's done automatically. And that's also a place where investors have been challenging us for years now. We don't know what's going to happen. That's not our business. Our business is purely transactional and we want to make sure that we are in that business and not on the trading, if you will. So there's no currency inventory, right? You're clearing your books every day. Yeah. Ideally, we would hold local currency for a second. That's what we ask our treasury function. Then reality of the ground requires sometimes for us to have

Starting point is 00:26:24 longer positions, but there's never going to be a situation where our traders are going to say, no, we're going to hold our position in realis because we think on Monday we're going to have a better break. No way on earth. Can we talk about the distribution of your product and its adoption and how you've affected that? Because with most API companies, you're facing developers and building community, building great documentation, oftentimes it's a bottom-up adoption versus selling into a chief information officer or something. Tell me what you've learned there. How do you go to market? How do you reach your customers? What is your sales and marketing method. We are slightly different in the sense that we are serving big enterprises.

Starting point is 00:26:58 I would love to tell you that a developer inside Apple will make the decision to integrate into us and launch our solution across 30 emerging markets. It won't happen. That's not how our sales process works. Fundamentally, we deal with people on the finance teams and on the payments teams that are extremely savvy and understand this challenge very, very well. And they're looking for a partner to help them navigate this complexity. We are not in a situation where we need to go and explain the complexity. Our merchants do understand it really well. well, they see the pain point and they are trying to navigate. So we have a very small sales and marketing team.

Starting point is 00:27:29 Overall commercial team, it's less than 80 people as of today, including account management customer success. So it's a very specialized team, very high touch. And it's a team that really understands the complexity behind the payments where we operate. So our counterparts are experts and they're counting on us to be extreme experts on the markets where we operate. And that's a reasoning behind not having hundreds of thousands of salespeople. At the end of the day, when you're doing a deal with Spotify, there's two people sitting

Starting point is 00:27:53 on the table. You won't be able to see it 50 people. We invest more on making sure that those two people will have the information, the context, be empowered to understand our product. Then we invest a lot on understanding our merchant needs. We've seen many industries. So we know how Spotify should think because we've seen it happening with Netflix with HBO. We know how DDI will think, because we've seen it with Uber, with Kavify, with a driver, with Rappi. The same happens for retailers. So having the experience of understanding what drives the needs for each vertical and really understanding the reality on the ground, it's really important. The only caveat to this is marketplace, where we are powering thousands of smaller merchants that come through a marketplace. That just goes

Starting point is 00:28:30 to your point of making sure that our product is easy to use and that we are top of mind for the next small Shopify seller than wants to sell into cheap. And that's a whole different set of needs and expectations to more merchants. Is that a relatively small part of your business overall? I would think you dominated by the huge international players. Most of our business, still comes from big enterprises. I think it's going to continue to be the case. Having said that we do invest a lot of marketplaces. We think of the marketplace as our customer. When you think of a marketplace, they are trying to give tools for all of their sellers or all of their ecosystem. And we think we have very strong offering in that ecosystem. But in our DNA, it's going to be

Starting point is 00:29:10 more normal to go directly to the marketplace owner, to the weeks, to the Shopify and say, these are the tools we can provide for your sellers than going directly to the sellers. There's a nice thesis that I like to think about, which is that for every repetitive digital function, there will be an API first company that standardizes that function and provides a sort of Lego piece so that developers can build as many apps as they want and they basically hire out the discrete repeatable functions. Since you're doing that, providing one of those very big function in this case, abstracted away from payments, what have you learned just about great API building? What advice would you give to the founders out there, not in payments, but just in the API space that are trying to

Starting point is 00:29:49 build an excellent single function that becomes widely adopted for developers. I think the biggest temptation when you're building an API business is what your API should do or what it shouldn't do. And what are the limits of what you're trying to build. APIs are powerful where they're standardized. So if for any given use case, you need to integrate into five different places, even if the value proposition is great, to me that's dead before starting. We always try to find an initial pain point that can be covered and be ruthless about saying no to the other stuff because we think that's a way you generally differentiate. It's tough to be solving hundreds of things because you are aiming to standardize. By definition, if you

Starting point is 00:30:28 standard is you need to say no to some stuff. If you have too many use cases, you are not covering anything. That's something we've learned and we've learned the hard way. The other thing is API businesses are sometimes tempted to compete with their customers. When you are providing infrastructure, you are sitting in the middle of that transaction where value is being created. And it's very tempting for companies to say, I understand the user, I understand the merchant, why do I sit in the middle? Part of what I think has made the local successful as of now, it's making sure that our merchants and our counterparts understand that we are not here to compete with. We are here to power them. And for infrastructure place like us, and typically API-based

Starting point is 00:31:03 companies are infrastructure placed. I see many of them being tempted to be in front of the end user. and that's something I would strongly discourage. Maybe we could give an example of each of those two things. Those are awesome lessons. So starting with the first one, Indi Local, what was an example of a feature that was tempting to build or that you did build that turned out to be too much of a distraction for whatever reason? We've been asked 100 times to go to Germany or to the UK.

Starting point is 00:31:28 Is it easy to do from an API standpoint? Very easy. Do we have the regulatory framework? Absolutely. Are we going to do it? No way. Part of that is saying, what are the use cases that are really complex that we're going to be able to solve? I'm sure that we could get some traction in that business.

Starting point is 00:31:41 Is it going to be a differentiator? No, it's not. So we'd rather double down or invest in places where it might take longer, but if we get it right, we are differentiating. That's why we get much more excited over Bangladesh than we get about Germany. Because there's other APIs that are solving the Germany problem really well, or the UK or the US problem really well. That's one lesson.

Starting point is 00:32:00 On the second side, on not going after your users, when we were starting, we got many of our merchants to ask us to send emails to our database saying promote our product. Today, it's very easy to say no. Back in 2016, when we were starting, we said it might be tempting. And we understood really fast that that was not a smart decision. Many payments companies do that. We were always against it. Because the moment you do it once, you start the next iteration into this is the next product. You should be buying. This is how you should be thinking about which right sharing company to use. And we want to be able to provide infrastructure. We shouldn't be choosing winners. It's very tempting and it's something we haven't

Starting point is 00:32:33 done. And we are strongly committed not to do it. How would you describe how you've been able to move so fast? You mentioned starting mid-2010, 2010, 2015, 2016. Here we are in 2022, and it's a very large $10 billion public company. That's a fast building of enterprise value. Why were you able to do that so fast? What's behind the speed? First of all, it doesn't feel fast from the inside.

Starting point is 00:32:55 Things take forever from the inside. We're always pushing for them to be faster. And when you do enterprise sales, the way we do, cycles are long. When we started the local, I was 25, and I was essentially. And I'm still anxious. And I would like things to happen 10 times faster. I think the key behind the success, and I wouldn't call it fast, because I see that things taking time, is the fact that we always focus about doing the things that matter. And we weren't out there doing stuff that was ancillary. We bootstrap the local for the first four years of our history.

Starting point is 00:33:23 So we didn't spend much time thinking about funding rounds and PR announcements. We are a company that has been dedicated to operating its business. So you won't see us running our own funds or our own investments. We are running the local and this is what we are committed to. We've stayed extremely focused in this idea of emerging markets. Those three key things have been extremely important. And we built it from a very different background than the average Silicon Valley company. That has become really deeply great in our DNA.

Starting point is 00:33:49 We always cared about being profitable. We cared about serving our merchants. You mentioned the market cap. To me, that's a consequence. And it will continue to be a consequence. It will go up. It will go down over time. Both will happen and that's perfectly okay.

Starting point is 00:34:01 What we should make sure is that we are building a business that's healthy, that manages to generate profits, that it's adding value to its merchants, that adds value to the ecosystem where it participates. And those are the pillars we really care about, much more than any PR or other stuff that I think are sometimes very distraught. What are the ways that you think DeLocal could most improve as a business or a service? The secret for the local, it's for you to be able to be extremely local, but at the same time, standardized. That formula and how fast to do that, it's extremely important. And I think that's a place where we're never going to be good enough. Whenever we launch a new market, understanding the reality on the ground, understanding what are

Starting point is 00:34:38 their frictions, but also being able to standardize that, that's a place where I would like us to be 10 times better. I happen to believe that the local doesn't have a market risk in the sense that we have all the underlying trends that go in our favor. There's all the secular trends. E-commerce becoming more relevant. Emerging markets become more relevant. So for us, it's all about execution. It sounds super basic and boring, but that's where I want us to be better. in our commercial efforts. I want us to make sure that our customer success team gives our merchants the best experience on earth. We need to understand markets faster. It's a pure execution play. With execution in mind, how do you run the company? What is the operating system

Starting point is 00:35:13 that you've installed inside the company? There's famous ones like OKRs or V2MOM at Salesforce. There's lots of these different styles or methods. Have you adopted one of those or built one of those? No. We are trying to make it as we go. We follow an approach. of extreme responsibility, but also a lot of humility. Our background has defined us in that sense. We weren't supposed to be here. Keeping that humility and keeping that ability of learning, it's extremely important for any leader that comes into the organization.

Starting point is 00:35:42 We give our leaders extreme freedom for two reasons. One, it's because it's the right thing to do, but two, because we don't know. And we need them to make us better. So we expect a lot of our team. We are very clear about the fact that we are a professional team player. I love that concept from Netflix in the sense that we all need to be better all the time in order for the organization to be better.

Starting point is 00:36:00 And part of that it's giving people freedom. Go do what you need to do in order to make us better. And the other thing is that we've always been very basic in terms of the KPIs we follow. So we don't have a thousand KPS. We want to know how much volumes we are doing. We want to know what's our revenue, what's our gross profit,

Starting point is 00:36:14 how much we are spending, and therefore what's our EVDA. And those metrics apply to the whole company. Our salespeople are looking the same numbers that I am looking. And I think when you have those incentives align and you give clear guidance in terms of what's important and what's not, life accounts much, much easier. That's how we operate. But we are refining it, obviously, all the time.

Starting point is 00:36:33 Usually this idea of constant improvement of the team bleeding into the company starts at the top. So in what ways have you personally most improved or gotten better, do you think, over the last several years? I don't know if I've gotten better, but I do know that I've challenged myself systematically. I try to make sure that every now and then I'm in a situation where I'm uncomfortable, where I need to learn. We went through the IPO process and obviously that was a heck of a challenge. Being ready to be a public company, being the CEO of a public company, that definitely is something that wasn't ready for four years back or even one year back. Putting yourself in those positions and making sure you're never the one holding the company back

Starting point is 00:37:08 and be very transparent about it. It's extremely important. In my case, it has also meant understanding whether their functions are better if they're run by someone else. So our technology team is being run by Hako, who's our president. He runs it and I trust Hako with everything. Part of that was understanding that he was much better than I am at doing that. When you have that low ego environment where people understand that things need to be done and we are sometimes going to be playing different worlds in that given day, that's super helpful.

Starting point is 00:37:33 I always tell the team and I think it myself, I'm not the local CEO. I'm Sebastian, who happens to be the local CEO at this point and therefore I need to be doing the best I can. But if tomorrow someone else, it's better to be CEO of the local, we should all encourage it. And that happens at every single position in the company. And I think the moment we stop being in love with our titles and we are in love with what we are trying to do, that's very powerful. What's the reason behind this mentality that you seem to have of deep humility? Where does this come from?

Starting point is 00:38:00 I don't know. That's the first answer. If I have two guests, I think it comes from two places. The reason why I like what I do is because I continue to learn. If you're not humble to recognize that you're learning, it wouldn't make sense for me. I'm trying to find ways to learn more. And the best way of doing so, it's recognizing that you don't know that much and you're trying to find ways of being better.

Starting point is 00:38:18 And then I think there's something of a personal background of where we come from and Uruguay, being a small country and being used to trying to be this way. What do you think the biggest mistake that you've made as a business is in Deolocal's history? And what did you learn from that mistake? We were shy. We were shy when we were starting. We should have invested much heavier in 2016 and 2017. Being bootstrapped, it was tough for us.

Starting point is 00:38:40 We wanted to be a U.S. company. We said, how do we make sure we are perceived as a Silicon Valley company? That was a mistake. We are who we are. We come from our own backgrounds. and we can differentiate and build amazing companies from very different places. That's an obvious lesson. And in terms of investment, which is the flip side of that,

Starting point is 00:38:55 one of the things that I see in Israel where I live or in the valley where I spend a lot of time is that companies there to dream big. In Israel, you see that all the time. And that's something the logo had to learn. We started small. We didn't know we could be this big. It took us some years at the beginning to say, okay, we can really make an impact. We can create a huge company no matter where we started from.

Starting point is 00:39:14 And that has been a lesson for us. This has been so much fun. As I said at the beginning, I'm fascinated by the entire payment space. Your company and others reduce this friction in such an interesting way that enable more commerce online and throughout the world in such an interesting way. And I love the style with which you've built the business. It's distinct and interesting. I appreciate your time.

Starting point is 00:39:31 I ask everybody that I talk to the same traditional closing question. What is the kindest thing that anyone's ever done for you? This is something we say a lot of the local. We have all the background. We are not here just because of our efforts. we are here because we had a background that allowed us to get here. Being born in the family I had a lack to, that's very lucky and a very kind thing.

Starting point is 00:39:51 And we cannot give it for granted, particularly when you see others that don't have that. And that's when you realize how much of a difference it's been. Randomly, we are recording this on the same day we released an episode with my friend John Feffer, who also lives in Uruguay. So it's funny that my two Uruguay-related episodes have a day in common. For those that would like to learn more about Uruguay or come visit, how would you recommend we approach the country, which sounds wonderful?

Starting point is 00:40:11 First of all, come over. The biggest challenge you're where it has is that it's far away. Other than that, everything, it's nice, it's easy. It's a beautiful place to visit. People are welcoming and it's absolutely beautiful. I've had the chance to be in a few places in the world and this continues to be unique. Fantastic. Sebastian, thank you so much for your time. Patrick, appreciate it. Thanks very much for having. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

Invest Like the Best with Patrick O'Shaughnessy - Sebastian Kanovich - Powering Emerging Markets Payments - [Founder’s Field Guide, EP. 56]

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