Bill Kelly (7:09)

I appreciate that, Andre. So a few questions and observations and then we can get on to maybe the heart of the discussion. So it's interesting, you alluded early on in your career some of your exposure to the fledgling days of the Internet. And I don't know if there's comparisons to be drawn or not, but I think throughout the course of my career, there's always this concept of first mover advantage. But when it comes to technology, I think it's more a first mover's disadvantage because they're spending all the money making a lot of mistakes, and the next dollar is sitting on the sidelines watching. An example I've used quite often. And younger students or professionals will never remember the name of Netscape, but they had the browser market, it was theirs, and now they're gone and it's Google. So if I draw a comparison, and I think I saw this in one of your notes, that you may have shared with me, OpenAI was a category killer. And then all of a sudden mainland China pulls the curtain back and this deep sea animal is hiding behind it, doing things for a fraction of the cost. So I don't know if there's a question or observation there, but maybe it is about this concept of a first mover disadvantage when it comes with disruptive new technology.

Andre Massiel (8:24)

AltaVista and several others on the Internet search landscape. I think in technology, instead of buying equity, you're buying a call option because not only you need to get the name right, but you need to get the timing right. If you buy a call option ahead of time, it expires before you have had the chance to exercise it. And if you buy it too, something that has the standard that's too far out, you're going to pay too much. So you need to buy that call option at the right time. There are points where simply societies are not ready for that type of technology yet. So being at the right moment at the right time is part of investing in technology. That's for sure. In Latin America, that's for sure as well. The advantage that we do have in Latin America is that I don't think we need to be very creative in the types of technologies that we are trying to implement there because we do have a leg to more developed markets so we can see what's working elsewhere. And maybe we'll not be able to invest in global companies that take a certain technology global, but when the concept is adapting what's possible with this new technology, local needs, there's a lot that can be done. And in this field, I think AI is phenomenal because we always have had a lack of developers in the region and now that AI is able to leverage the developers that we have over there, there are a lot of solutions that could be done better for technology.

Bill Kelly (9:44)

The big spend in somebody else's market presents maybe some unique opportunities. And just a data point I saw last week, Meta, Amazon, Alphabet and Microsoft have been on record collectively. Just in 2025 alone, they're going to spend $320 billion of AI. So it's here to stay. But quoting you or one of your letters, I thought it was a great description about AI. Incipient yet transformational. I think the way we talk about it is as if it's been around for a long time. But ChatGPT entered the vernacular not that many quarters ago. But yet there's a ton of money being thrown at it. And I think you either were or maybe sitting right now in Miami. And you certainly as an investor have to pay attention to global trends. But how do you look at what's happening in countries like the United States or regions like parts of North America versus what you might see in latam?

Andre Massiel (10:41)

I think the cool thing about this technology is that even people who are very close to it, they do not have a very precise answer. You hear the investor relations call from Alibaba a few weeks ago when they're talking about how they're doing their AI development, they call the technology transformational. But in terms of applications, how things will grow from there, they say even for us, it's too early to understand what will be all the total implications of what's being built here. And when you talk at people at OpenAI, there are a few Brazilians that we talk to from time to time or at some of these other companies, they say the same. A lot of our building is based on trial and error. There is a lot of what's being built, but there is really no blueprint for what we're trying to do. So we don't know. There's a lot of new ways of doing things that are definitely coming up. So we are very careful when you have this technology shifts of being all in in a certain assumption because when people who are doing it, they are not quite sure how these things will develop. I think the investors who are a layer apart or maybe a few layers apart is difficult for you to take an all in approach or yet to see all the different ramifications. But only a few months ago what I was seeing as something that you could not build, unbelievable computing power model like OpenAI now is being built by the Chinese, but maybe less so now. And financial announcement, they built a model using Chinese native chips. So it's interesting to see everything that's happening. It's transformational. I don't think there is anyone who has all the answers, but it'll change everything.

Bill Kelly (12:16)

Taking this more specifically into the Latam market, I think I understand your investment universe. It's primarily Brazil, maybe Mexico and the rest of Latam. You don't go beyond those regions? Generally speaking, yes.

Andre Massiel (12:32)

We invest generally in Latam, Yes.

Bill Kelly (12:34)

And your LPs, where are those dollars coming from? Are they Latam sourced as well?

Andre Massiel (12:39)

A good chunk of those dollars is coming from Brazil. SoftBank's an investor in US as well. There are a few international LPs then we have an institutional P in the US.

Bill Kelly (12:49)

So as you think about then attacking this market in terms of earning a fair return for your Investors, which is the name of the game, as we talked about a moment ago before we hit the record switch, when you're dealing with very explosive and ever changing technology, which you have in software in general, but more specifically in AI, the challenge for somebody like you, Andrej, is that you're beginning fundraising in one cycle, ending fundraising in a different cycle, investing in another, and then liquidating in another one still. So there's a lot of different things you have to pay attention to and what you thought was going to happen when you began fundraising and what's happening on the other end at exits are dramatically different things. Especially again, when the underlying asset is changing so dramatically as well and there's nothing much you can do about that. But as you think about trying to get something right, and I'm not trying to put words in your mouth, but I think starting with a more finite set of dollars and a finite set of investable companies gives you at least a lot of running room, because you're not trying to resolve issues across four or five different portfolios trying to invest dry powder. Sometimes size is an advantage and bigger is better, but when you have this pace of change, maybe smaller is better too. So maybe some of your general views on those various observations, you say, well.

Andre Massiel (14:15)

I think when it's a very easy time to fundraise for a fund, it's probably a terrible time to be deploying very quickly in companies. So we've seen that from time to time. The rule that I think has not changed, that when there is too many people fishing, as Charlie Munger said, in the same pond, you're not going to get a lot of fish. And we've seen that in Latin America quite, quite often Latin America is a smaller market. Sudden changes in flows, they change completely the pricing dynamic of assets. To give you an idea, up until 2017, VC and growth investing in Latin America was about a billion dollars per year. That number in 2021, only five years after that went up to $16 billion. And if you have a funnel that's that tight, you really cannot increase the investable dollars by that much without forcing too much on valuations on which companies you rule. Number one, in Latin America, you do have this higher volatility of flows to the region. So you need to be investing through different cycles to make sure that you capture different moments of the flow. Now it's back at $4 billion, which we think is reasonable. Number two, in Latin America, only during the investment period of a fund, you're going to have two presidents. In Brazil, maybe One president and a half in Mexico, they have a longer term. You're going to have two presidents in the U.S. we're going to have a lot happening globally. So you want to make sure that you find a way of deploying a little bit in each of those years. Because when you're living through a bubble or a depression, it's very hard to tell. But what's not hard to tell is that if you move out your flows and you deploy a little bit during your investment period, you're going to have a more diversified fund. And if your thesis is proven right over time, there's a very likelihood that it would likely deliver very good returns. As an investment strategy, we try to take a deployment of around 20 to 25% per year. So we tend to take longer to invest, but we think that that's the best way of doing that in Latin America.

Bill Kelly (16:13)

Is there a number of portfolio companies in the current fund? Is that something you can state specifically?

Andre Massiel (16:18)

Yes, we have 11 companies in the current fund, so we've been adding three per year during the investment period. We should finish fund one with about 15 companies out of which will make some five part positions if I just.

Bill Kelly (16:32)

Stick with a dozen to round it up. In order to get a dozen portfolio companies into your portfolio, due diligence is critically, critically important. And transparency when you're dealing with a startup is always difficult. There are assumptions you need to make. How is due diligence different in a market like Brazil than it might be in North America? And it might even be better because we've seen situations where you assume somebody else has done the homework because your co investor is a big name. But you have to probably do a lot of this muscling yourself. So could you tell us a little bit about the due diligence process for portfolio companies that either make it in or get rejected?

Andre Massiel (17:12)

We have an advantage in the space that we invest. So we're mostly investing in companies that were founded less than 10 years ago. And in Latin America that's an advantage because older companies that tend to have a lot of contingencies, tax contingencies, labor contingencies, which newer companies do not have. And if they're doing any practices that could generate those contingencies, you have time to address them before they become too big. So that's a huge advantage of the category that we have in Latam. Another advantage, even compared to legacy companies in the region and some other companies in this space of technology and other emerging markets, I cannot think of any major governance or fraud issue of Investing Latam so of course there was a lot of mismanagement issues, companies that went belly up because they had poor execution. But in this space generally has been a new generation of founders that have gone to good schools. They want to build good companies want to do the right things. It was very rare. And again, I cannot think of any in our universe of companies and also other funds that has had any major governance issues. What we do have is to spend a lot of time understanding how the numbers are. And a lot of these early stage companies do not have the best accounting. So we do take our time. Generally after we sign terms, we bring the big four accounting firms to go through the numbers, give us a good sense of economics. Generally what we're spending time on is not on historical financials. We're spending time on current economics. So the product that the company is selling makes sense. Sense. And they're having growth traction. So if the economics of that marginal product or service where they're selling work and we can understand consumer attraction through pipeline conversion, that's when we invest. So it's easier as well from that perspective because I'm not necessarily focus on confirming the last financial statements exactly. That we need to understand. That was approximately right. But what we need to understand is that going forward the company is likely to do what we think they can do.

Bill Kelly (19:12)

And I don't know if you've had any exits yet, but if you haven't, you're probably anticipating them. I'm curious to know what the exit market's like. And Maybe this aforementioned 300 billion coming out of some of the big names in the U.S. perhaps some of them are strategic buyers. But is the normal outlet to go and get listed on say the Brazilian stock exchange?

Andre Massiel (19:32)

I'll say there are a few alternatives. We have had a few exits. One of the exits that we had we just sold to our international fund. We sold it out early, but we wanted to show that good returns were possible during this cycle in Latin. So it was an investment that we sold at about 2x our investment price in a holding period of circle a year and a half for the overall amount. So it was a very good investment. But there are three alternatives in Latin America. I'll say One, we have a very active M and A market in Brazil. There are over 200 MA transactions per year of reasonable size. So it's very active. It's a market that's welcoming on foreign capital. So an Indian company can buy in Brazil, European company can buy in Brazil, Chinese American company. At some point Boeing was Thinking of buying the Brazilian aerospace company, a company called Embraer. I don't think that there is any other market that you let a foreign company buy. Your main airplane producer generally regulations that are very open to foreign investors in the region. So that's the main alternative. The second alternative, which for a fun of us may make sense from time to time selling to other funds. So we're reaching halfway through that investment. Start evaluating that. I'll say the third alternative, which for us is less of something we consider when we make an investment as an exit through ipo. And there are two alternatives for the large companies they can always list in the US they trade with significant liquidity. So I'm in the board of a company called Inter, but it's a US listed digital bank. Nubank is a company that's listed in the U.S. mercado Libre is listed in the U.S. and there are quite a few from this past wave in 2021 that listed in the US but that's generally for companies that have market cap of $2 billion and higher. And you do have an alternative of leasing domestically. Over the last few years to keep inflation at bay, the government has increased interest rates in Brazil. So right now it's at over 14% per year. So huge inflation's at around 4, so it's under control. With interest rates that high, the IPO market has been somewhat closed for the last three years. I don't think it's too different than the US in the US last year there were only five IPOs in technology, which given the US market size, that's probably nothing. I think we need to see a cycle of lower interest rates for the market to resume.

Bill Kelly (21:47)

And then another important aspect to the ecosystem is talent. And if these are young companies, they probably only have a handful of employees and as they grow they need more tech enabled employees. What is the talent pool like in a market like Brazil, just to focus on that one reaching country?

Andre Massiel (22:04)

In the last decade there was no startup talent in Brazil, Max, or anywhere in Latin America. And we got very fortunate because there was a wave of entrepreneurs from the us, from Germany, from other global markets that moved to Brazil and they started some of these companies that became very successful. And with that wave, even David Velis, who founded new bank only 11 years ago, he was an investor at Sequoia, had studied at Stanford, and then he brought that expertise back to Brazil and helped found a company of that size, banks worth more than $50 billion today. That wave brought that expertise. I think the thing that we started seeing down there is that people before they wanted to get a craft, not only graduating to certain things. So a lot of Brazilians, they went to be lawyers. The funny fact is that in Brazil you have more lawyers per capita than anywhere else in the world. Two times more than what you get in England, for example. And that's in a country where you don't have a lot of people going to graduate school. But with this new thing of startups making money, entrepreneurs being successful, it attracted a new crowd and not only had this expertise, these people have learned from this first wave of startups, but you have all these graduates now they want to work in that. So the number of Stan graduates in Brazil increased by 80% in 10 years. And now we have a number that's larger than the number of Germany or France. So now you have a new pool of talent, of course, a young pool of talent that is a pool of talent that's being developed. But there is a eagerness to be part of this ecosystem.

Bill Kelly (23:41)

And as more of this talent emerges and the success stories come out and successful exits, oftentimes that does not go unnoticed by some of the biggest VCs in North America. And all of a sudden a market where you had the corner, you look left and right and up the elevated bank, and all of a sudden you're seeing the Andreessen Horowitzes and others come in. I guess there's maybe positives to it because it shows that that market's arrived. But I think if you look into add basis points, more competition means less alpha for one specific manager. So where is Brazil or Latam in that maturity process? And how do you think about competition as some of your success stories get out as they rightfully should.

Andre Massiel (24:24)

So we've seen that from time to time. But whenever there was a moment of liquidity, a lot of international investors would flock to the region and that would cause price distortions. It's very important to be careful during those days. So back in 2021, there were over 75 international investors participating in transactions of above $50 million into this technology companies. That number has come down to less than 13 last year. So it has significantly reduced. I think there is still interest in the region, but now at a much more measured pace. It is true though, doing high liquidity times when there is too much capital, maybe the best thing is just to wait on the sidelines and see how the market clears or invest slowly. It's very difficult to tell when you're going through that. We stick to our framework of investing a certain amount per year and maybe you'll get some money out doing some of those years and that's fine. But then at least we have a. We move out the cycle.

Bill Kelly (25:20)

Maturity is maybe not the right word with AI, but when are we going to reach a level where the opportunity and landscape becomes much more clear and we're more into that next phase of investing, which maybe that goes beyond vc, but there's always going to be that next innovation where it's sort of the space of vc. So where are we in this maturity cycle of AI?

Andre Massiel (25:45)

I think we're going through the very beginning of what can be something very meaningful. I think this applies to most of our economies, definitely applies to Mexico, Brazil. But take Brazil as an example, is a very bureaucratic country, is a country that has low productivity, is a country that has a lot of government related processes that you need to go through. And then when you apply AI tools to that now you enable a significant part of the population to go through those processes. A population that maybe do not attend school in a way that made them effective throughout that bureaucracy. But now with AI they can manage for some of that. Now you can address a lot of the issues in paying taxes in Brazil, which are very byzantine and it takes up a lot of time. So we put that into an AI system and you have an answer right away. Dealing with legal claims, which can be a hassle for large companies over there, something that can be done through AI. There's a Sequoia backed company now called Enter that's basically digitalizing that process and applying AI to all of that. So the advantage that despite being a bureaucratic place, it's very digitalized. 99% of the court cases in Brazil digitalized, all the documentation, everything is digitalized. So when you apply AI probably can cut for a lot of that bureaucracy and red tape. So I'm very excited for what it.

Bill Kelly (27:03)

Could be and maybe we could take a few minutes before I let you go to talk about the impact of this pace of change and what it means vis a vis privacy and regulation. And I think when you have change moving at this pace, it's very hard to keep things like regulation and privacy and pace and they settle down over longer periods of time. And it may or may not be a company you're involved in. If it is, you can just wave me off. But I've used Clearview AI as an example. I don't know if you know much about them, but it was started several years ago in the US and as the thesis goes, they scrape images of you and I and Pauline and everybody else from Facebook, from LinkedIn, from Instagram, without our approval. And I think it was required, but they went ahead and did it anyway. And then they go out and they sell it to law enforcement agencies, et cetera. And certainly in the US there's been a lot of litigation and I think there were 20 some odd state attorney generals that just brought a class action lawsuit against them, which is moving close to settlement. But the settlement in my mind is ridiculous in that they're giving equity ownership and Clearview AI, if you want to opt out, you have to specifically go and opt out. So it's more like, well, here's some hush money and we move ahead. So you can comment on that or not. But I think the broader question is we still have not reached a cruising altitude about what is really fair around privacy, what is really fair about expectations of the end investor and maybe this next generation. I've got five kids and their views on privacy are very, very different than mine. And I don't want anybody to know my Social Security number, my date of birth or telephone number. And they probably have all of that on their profile on TikTok as an example. So I think we still have to be careful. But what are your views on this? At least in my view, a gap between how quickly the industry's going and have we done a good enough job of looking at the ethical backbone of what we're taking on? Because it is moving at warp speed.

Andre Massiel (29:11)

For good or for bad. Most of that framework will not be developed in our countries in Latin. So I think we'll end up using what's going to be developed elsewhere. I think regulation in the regions is a few steps behind. And again, that's good and that's bad because without regulation can move very fast and you can implement things very fast and learn from that. It's not a surprise that Uber and all these other companies that had to attack some aspects of regulation in the past, they're so big in the region when there was a need. And there is this sense of being pragmatic as well in the region of allowing this technology to address these local needs. I'll give an example looking at a company the other day where they use a face scan to basically allow you into stage to watch soccer in Brazil, of course, is a huge thing. By using that face match, when you buy your ticket in your face and basically at the entrance, you only have a face match. It's super cool the way it works, and it works extremely well in one of the last games, they arrested five people, but they had been looking for them for a while just because of that face patch, because everything's digitalized. Probably that was a good thing, and I'm sure there was a lot of regulation that was stopping that from happening, or probably there was just some consent. But when people bought the tickets, they just read it or did not read it and just accepted it. But it's very interesting how that's happening at a fast pace, and I think it will address some of the big issues that we have down there, including crime. But the answer to your question is that I don't think that there's a lot of thought in local regulations. In the tug. Of course, we have discussions, we have some frameworks, but not a lot of thought as we've been having elsewhere.

Bill Kelly (30:44)

Maybe at the risk of this whole conversation me sounding naive, I will say, to your point just now, Andre, that if I come into the US From a foreign country, I don't even have to show my passport anymore because my face is known to TSA and whoever else. So to think it's not out there being captured time and time again. And I think it was interesting. I think the New York Mets baseball team had something similar where I think you got a discount if you went to the facial recognition ticket purchase. And I think people were happy to get the discount, not realizing that they basically sold a portion of their privacy for that and whether or not they got compensated for it. Well, enough time will tell. And it's going to be interesting. This 23andMe, this DNA website, just gone bankrupt and now in bankruptcy is going to be a lot of people's underlying DNA for sale. We're not going to solve for that, But I think you're right, it's always going to lag. But I think it puts a premium on us as professionals to at least try to draw a line, to say, well, you know what, this has gone a little bit too far, because ultimately the regulators do have the benefit of operating with 2020 hindsight, and 2025 decisions are going to be looked at through a 2028, 2030 lens, and you better get it right, as opposed to just trying to eke out every last basis point possible.

Andre Massiel (32:06)

The other day, I was looking for a tool for my garden. We were looking at that online. I was looking at that on my computer. And then the next day, your Instagram is just showing tools for garden. I was like, oh, my gosh, I.

Bill Kelly (32:15)

Have the same thing with Airbnb, et cetera, and it's one thing for a garden tool or a place I want to rent. But when somebody understands my behavioral tendencies around not liking bear markets and all of a sudden some product pops up, it's playing into my worst tendencies. And is that really part of a thoughtful asset allocation mix that has an impact on my retirement? Less so. I think these tools could be very, very valuable, but in the wrong hands with the wrong motivation, maybe. Less so.

Andre Massiel (32:49)

I fully agree. I think they maximize some of our biases and they use them to. In a way, it's against us, you know, selling what's going low, buying what's going up, in a way, creates this FOMO for everything. So, yeah, for investing, it's particularly dangerous. I fully agree with you.

Bill Kelly (33:06)

Before I let you go, an infomercial for your part of the world. I've been fortunate to go to Brazil a couple times. Apollo and I was in Ipanema beach for a conference. Believe it or not, it was a conference. And then I was in Colombia and Peru. And it is a bit of an eye opener in terms of I spent a lot of time with students and we talked about that and the demographics. And it seems like in some countries, and this might be Chile, that the opportunity set for retirees sounded a lot like what I saw in Australia, where you've got the super funds, where there's a big fund doing the manager selection, the due diligence and the investing on my behalf. I don't know if that exists in Brazil or not, but I think it's a very interesting, very populous market and I think you ignore it at your own peril.

Andre Massiel (33:54)

I fully agree with you. And even for other managers, I think at some point we'll have a lot more local savings. So you see what's happening in different countries. They created a pension system in Maxwell, privately managed, but the contributions are mandatory. That System today has $370 billion and is one of the systems with the highest inflows per year. So all the large firms that are down in Mexico trying to get commitments to their funds, from Carlyle to all these other large global firms, they have a similar system in Chile. In Brazil, they created a scheme that's not mandatory contributions, it's voluntary. You have tax advantage in doing that. And that system is growing. 12% per year today is already at $330 billion, not being mandatory. It's not the size of the Mexican system, but it's growing very quickly. So historically, Walls have had this issue of lack of local savings. And only one country, Chile, had addressed that back in the day and now that's growing throughout the region. I think it can be a great, great thing for the long term. When Chile was the only old country that had that and the pension funds were forced to invest in Chile, everything traded at 25 times PE. When everything else in the region was traded at 8. Having that local capital available can have a significant impact on exit dynamics, I think for assets in Brazil, in Mexico, if you invest for a long time horizon. So that's one thing that excites me a lot, having this local pool of savings being formed.

Bill Kelly (35:18)

A great observation and maybe a great place to leave it. I do know true of many investors, we have a home country bias. It's what we know, what we're comfortable with. And oftentimes, particularly if your bias is the United States, the alpha opportunity might be in less efficient markets where you're maybe taking some agency and country risk. But if you do your homework or find the right partner, you can minimize that and your upside toward the alpha component might be even greater still. So I do appreciate all that you do. Andre and I did see this Volpe Day. Maybe we could close with that because it seemed to be very open, transparent and I think open to the public. I saw one YouTube, maybe it was 2023. So I don't know what the current state of play is Volpi Day, but you seem to share information quite freely, which I think helps all market participants.

Andre Massiel (36:11)

We do a Volpe Day. We try to do it every year. We'll invest or I will invite someone that's very meaningful to the local ecosystem. Probably do one this year and then we break that into a session that's only for our LPs. In that session, we do share a lot of information about the market, how companies are evolving, the type of growth traction that we're seeing for some of these technologies solutions, which again, I think they're extremely sophisticated. But just looking at our portfolio, we have several cases, five cases, our portfolio of 11, that you have companies evolving from $1 million in revenues to 50 in a span of three years. So explain the trends that are propelling those companies forward. Spend a lot of time on how they're building teams or they're finding talent. And we put that for LPs, but then we invite someone that's important for the ecosystem to talk to the public. And we don't have a date defined for these years yet. Most likely will be in the second half, but it'll be great to have this audience joining us as well.

Bill Kelly (37:09)

Okay, well, I'll watch for it. I know you're working on a blog post that has some correlation to this discussion. I think the two of them will come out about the same time, so I look forward to reading and learning more about that as well. But I appreciate you educating myself and the listeners to Andre and wish you and your partners continued success.

Andre Massiel (37:27)

Bill, it was great to be here. Thank you so much for this opportunity and looking forward to keeping the channel.

Bill Kelly (37:33)

Thank you. Andre, thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Kai association and subscribe to the show show at kaya.org that's C-A I A.org see you next time.