Why and when it pays to become a bank, parallels to previous cycles and Brazil’s fintech masterplan
Guest post by Pat Alex, Endeavor
Quona’s Jonathan Whittle was recently a guest on The Enthusiast: Founder & VCs beyond the Valley, where he shared what brought him to VC, what keeps him excited about Latin America, and what he thinks is coming up next. Here’s a recap.
- Boom and Bust: It’s important not to be overly optimistic about the recovery of the economy, companies that were able to pick-up fortune pre-crisis will always be better off.
- There is still an increasingly digitised, but still massively unserved segment of the business and consumer population across emerging markets
- Banking-as-a-service is allowing for more innovation and creativity around the design of products and services for niches and segments within the consumer and small business market.
- A new stage of FinTech: The possibility to leverage existing and proven infrastructure in combination with an advanced regulatory environment lies the basis for the entrance of new players and the development of products
- FinTech Legislation: Brazil has become a role model in FinTech regulation due to a forward-looking central bank and continuity over several legislative cycles
Both sides of the table
Jonathan grew up in Spain and Central America and his professional life has always been centered on Latin America.
He started in the telecom space, which was at its high-growth phase in the 90s when Jonathan kicked off his career. However, in 2001 just after moving to Argentina to manage the operations of a telco, the internet bubble burst and the economies of Argentina and Brazil went into crisis.
“You learn a lot through having been in rapidly growing companies, able to raise all the capital they needed to suddenly slam into a wall.”
With that he returned to the US, where he joined the private equity fund Darby Investments to manage a venture fund for Latin America. Back then it was one of the very few ones operating in the region. However, he was fortunate to be involved in some investments in the financial services space, which is where he first got exposure to FinTech.
it was time for him to change sides. He secured a non-bank issuing license with MasterCard — and founded his first company in 2011 a precursor to what today are Challenger banks.
After being the CEO of that company for the first three years, he wanted to get back to the investment side.
The result: Launching what today is Quona Capital together with his co-founders Monica Brand Engel and Ganesh Rengaswamy
Quona is the first global emerging markets-only VC firm focused on fintech and adjacencies to finance, backing innovators that aim the enhance the quality and availability of financial products and digital solutions for the masses and underserved consumers and SMEs. Geographically the focus is on South Asia, SEA, Latin America, MENA, and Sub-Saharan Africa.
“Starting a fund itself is very much an entrepreneurial endeavor.”
For Jonathan, Quona is the perfect combination of what he loves to do: Engaging and partnering with entrepreneurs at an early stage who dream big, building companies, and manoeuvring them through good and bad times, while at the same time building a firm from scratch himself.
Boom and Bust
A small macro lesson: One main characteristic of capitalist economies is the boom-and-bust cycle, which describes a process of economic expansion and contraction that occurs repeatedly. Jonathan has been through his first crisis moment in the 2000s, and is now dealing with the negative side effects after the boom year in 2021. He is seeing parallels and can draw on learnings from those times:
“I think we need to be careful to assume that things are going to bounce back to where they were any time soon. Perhaps they will. But I think we need to be prepared for a possible long slog.”
After the internet bubble burst, it took up until 2008 — not just for venture in Latin America, but also the US — to recover. Now, Latam is in a very different situation. The venture capital ecosystem is well-developed, has very deep roots and there is local capital at scale. However, Jonathan calls for not being overly optimistic in times of easy money that this capital will always be available. History tends to repeat itself:
“And even in the early 2022 era, those companies that had the foresight, in part pushed by board members — some of whom have that memory of what happened in 2002 — to raise capital, when it was available, are today in a much better spot than those that are out needing to raise capital today.”
Twenty years back, it was the companies that raised their fortune pre-crisis that were able to pick up a lot of assets and clean up, while companies that still required additional capital were severely hit by the crisis.
Also, in terms of stock holdings, it’s better to be prepared for a long winter. Or how Jonathan would phrase it:
“Don’t count your chickens before they hatch. Stay humble.”
However, there is no need to panic: for a great company there will always be plenty of capital available and for entrepreneurs, this is the time to focus on the business fundamentals and build a company that makes sense, has good unit economics, is capital efficient and has a clear path to profitability.
Jonathan has seen across their portfolio companies that multiple companies have gone through significant reductions in their workforce and have found that this morale can be managed and connected to high productivity.
Another piece of advice for the current times from Jonathan is to reset valuation expectations:
“Good companies are getting funded — but at valuations that also make sense.”
On the other side, there is a certain realism needed that companies that don’t yet have a proven business model, that are still trying to find product-market-fit and are still expecting to figure out monetisation once they get to scale are going to have a very difficult time fundraising today.
The FinTech opportunity
Regarding FinTech, Jonathan argues that the opportunity continues to be incredibly compelling and will be a major driver for deployment of capital in the next few years. That is due to two reasons:
- There is still a massive unserved segment of the business and consumer population across emerging markets, which is increasingly digitized and requires financial services designed and offered to them to serve their needs. This is a huge opportunity for technology companies.
- Due to regulatory advances — banking-as-a-service is allowing for more innovation and creativity around the design of products and services for niches and segments within the consumer and small business market.
“If you look at the profit pool of financial services in emerging markets, it’s astounding. The return on equity and return on assets of banks across emerging markets are multiples of what they are in the US, and many multiples of Europe.”
“This is going to fuel a lot of the FinTech investments that are at the intersection of commerce and Fintech.”
The FinTech space is more and more intersecting with other branches of the economy through embedded finance solutions that are leveraging high customer engagement and are increasing monetization and stickiness of the relationships.
Regarding the state of innovation and the waves they come in, Jonathan makes clear that there is still a massive segment of the population that is unserved or underserved. Adding to this, the B2B space has become more relevant over the last years, with some of the first IPOs in FinTech done by B2B companies.
However, it is not a new wave but rather a new stage: The innovation is coming from companies that can leverage the infrastructure that was laid over the last 10 years by some of the pioneers, such as the emergence of banking-as-a-service providers. They can focus on developing products and services for particular sectors with the ability to iterate quickly with flexible access to infrastructure at relatively low cost.
Combined with a regulatory environment that has been increasingly favorable to the entrance of new players, and that has embraced FinTech as a means to expand financial inclusion. Lower costs that break the hegemony of banks is what makes this new stage so attractive.
A FinTech law?
There has been a lot of movement in Latin America over the last years with Brazil being one of the countries leading the crowd as the country managed to create space for new entrants, providing them with regulatory certainty through their path of scaling and adding additional products and services.
“I would wish that all were able to embrace not just the policies, but the independence of the central bank that Brazil has. Because without that independence and continuity, we can talk about policies all day long.”
What’s remarkable about Brazil is the continuity over the last 10 years and the programmatic way in which they’ve opened space for new entrants and addressed each component of the financial services space as part of a master plan, which is only possible if the space is not politicised. They are extraordinarily smart technocrats, essentially managing this process, and have a clear objective driving financial inclusion, impacting costs and breaking the hegemony of incumbents.
Dive into the full episode on:
Special thanks to Pat Alex for having Jonathan on!
Disclaimer: Quona portfolio companies were selected for profiles based on objective, non-performance-based criteria for the purpose of illustrating the types of investment made by Quona funds and their impacts. These profiles are being provided for illustrative purposes only, in order to provide examples of the idea generation, research, and thought process of Quona investment teams. No representation is made as to whether or if the investment ideas represented in these profiles have been or will be profitable. It should not be assumed that Quona will be able to identify similar investment opportunities in the future, or that any such opportunities will be profitable. The above statements include the opinions of the Firm and are for illustrative purposes only. There is no assurance that any trends depicted or objectives described in Quona profiles will continue or become successful.