Hernan Kazah (00:00:00):
And we ended up being profitable in, end of 2006. And we went public in 2007 as a profitable company.

Pablo Strugo (00:00:09):
You were doing how much revenue, more or less, when you went public?

Hernan Kazah (00:00:11):
Yeah, so the full year of 2007 was $78 million. The prior year was something like $50 million. But when we were in year three, we were growing at 300%, and you guys are growing at 80%. And when we were at year four, we were growing at 250%, and you guys are growing at 80%. But the company kept on growing at that pace for more than two decades. Instead of finalizing the solution you're building for problem one, too quickly you want to move to problem two or problem three. And you know what? You only create value If you're amazing at something, you really need to be excellent at something. If you're okay doing many things, it's hard to create significant value. But the moment you go to sleep at night with $1,000 in the bank and you wake up the following morning with $1,001, it's wow. This is working. This is working. So that was true product market fit.

Previous Guests (00:01:13):
That's product market fit. Product market fit. Product market fit. I called it the product market fit question. Product market fit. Product market fit. Product market fit. Product market fit. I mean, the name of the show is Product market fit.

Pablo Strugo (00:01:26):
Do you think the product market fit show has product market fit? Because if you do, then there's something you just have to do. You have to take out your phone. You have to leave the show five stars. It lets us reach more founders, and it lets us get better guests. Thank you. Well, Hernan, welcome to the show.

Hernan Kazah (00:01:41):
Thank you for inviting me, Pablo. Pleasure to be here.

Pablo Strugo (00:01:44):
So you started a massive business. It's over a hundred billion dollar business now, Mercado Libre. And it's funny. I mean, you know, I'm from Argentina, so I've known of this business for a while. But I would say, like, you know, in the mainstream. It's, I would say it's only been the last few years, at least in Canada, maybe in the US, that people recognize just how insane of a business Mercado Libre is. But it's been, I mean. It's been a long time, right? You guys started in 1999. Is that right? (Context: Mercado Libre is the largest e-commerce and fintech platform in Latin America, offering online marketplace, payment, and logistics services across multiple countries.)

Hernan Kazah (00:02:14):
Yes, exactly. We started in August 1999, and I stayed there until 2011.

Pablo Strugo (00:02:20):
And August 1999. So this is like, it's like perfect timing and terrible timing, right? I mean, it was, you know, tech and all that stuff was super hot. But it was also a year before everything just completely fell apart.

Hernan Kazah (00:02:34):
Yeah. So it was one of those moments in time when everything looked possible, and that's why we're able to raise capital. It started with the famous bubble of the dot com era, but it was a short bubble. Maybe, end of '98 all the way to March 2000. And then in March 2000, as you were saying, Nasdaq started to go down, down, down, down. And the market disappeared in the world for a few years, in Latin America for almost a decade.

Pablo Strugo (00:03:11):
The last decade, yes. Well, especially in Argentina, too, because it had its own kind of situation that happened outside of just economics during that time.

Hernan Kazah (00:03:18):
Yeah, exactly. So on top of the Nasdaq crash, we had several crises in Argentina, in Brazil, and in Venezuela. So that was something that we knew by heart. How to try to deal with those ups and downs.

Pablo Strugo (00:03:38):
Yeah. You know, most, you know, American. Let's say North American founders are used to navigating all the issues of a startup. The micro issues, but not like, you know, inflation and macroeconomic problems on top. So it makes it doubly hard. Maybe take me back to, you know, right before '99. How did you meet your co-founder, and where did kind of the idea come from? I mean, Amazon had started. Obviously, eBay was around. Like, did you guys look at those models and just bring them to Latin America, or what was sort of the thinking?

Hernan Kazah (00:04:07):
Yeah, so that's a great question. We went to Stanford for our MBA, and that's where I met Marcos Galperin. He was a classmate, and we became friends together with another Argentinian, Martín de los Santos. That coincidentally today is Mercado Libre's CFO. We had lots of classmates in the business. And we went there during the boom days of the internet. Netscape had transformed the internet recently into something that was more for deep engineers into a consumer product. So everyone had access to the web, thanks to Netscape. So lots of applications started to be created on top of it. And as you well said, one of those was eBay, and another one was Amazon. And as graduation was approaching in '99, I was working on a technology business different to Mercado Libre, and Marcos was thinking in the idea of building. And he said it was kind of the eBay of Latin America. He looked into different business models. And at the time, the three main businesses were one, the Yahoo model, so search engine 1.0. The second one was Amazon, and the third one was eBay. Those were the kind of most successful businesses. There were other, like, travel sites, and if you think about those three were the major ones. And I think that Marcos, rightly so, realized that maybe we didn't have in Latin America the technology that was needed to build a search engine. A global search engine, or that local friction points that you could try to build being a search engine for Latin America were not so relevant as being just a great search engine for the world. The second one was Amazon, but at the time it required significant capital because you needed inventory and warehouses and all that. So in Latin America, given what we were just discussing about the ups and downs in the market, it was hard to assume that you could get enough funding to go through so much CapEx. And the third one was eBay, that was at the time a very light model in terms of just connecting with a software platform, buyers, and sellers. And somehow we realized that the trading thing was something quite natural for Latin Americans and that that would work. Obviously, that was not what most people believed at the time. But that's how Marcos ended up deciding on the eBay model that then deviated significantly from what eBay ended up doing. But initially, that was the idea. And luckily, he convinced me to join him and leave the startup I was working on. And we graduated in probably May/June 1999. And we started working on the business and business plan. And we launched on August 2nd, 1990, and that's the official launching date.

Pablo Strugo (00:07:27):
And what, like eBay at that time, was it at all available in Latin America, or was it just in the US?

Hernan Kazah (00:07:35):
They were very much focused on the US, but it was a successful company. And it became even more successful as time went by. Because UNIP of time, it was the only profitable internet company. Even more profitable than the Amazons and the Yahoos of the world. Google was just getting started then. So it was really, really a powerhouse. And that business model was proving to be very successful. Then probably they faced the typical innovator's dilemma, and because of the initial success that they had, they didn't kind of innovate in the business, and Amazon did innovate a lot and ended up creating a much larger company.

Pablo Strugo (00:08:19):
And what, like, when you decide? I mean, a lot of the. These marketplaces are about, you know, getting those network effects. Like getting things to spin. I mean, the idea is one thing. But actually making it work fundamentally is still exceptionally hard. Even in your case where you're, let's say, quote-unquote. You're taking a model that's already proven in one place. Bring it to another, but it's not your typical business where you can just kind of hustle your way to selling 10 businesses, 20 businesses. You gotta get something to spin. When you talk about that launch in August, what did you build ahead of that launch, and how did you think about getting things going on the right foot?

Hernan Kazah (00:08:56):
Yeah, so we like it. The business model, because of what you are describing. The network effect that it had. So as you could build an active. A liquid marketplace with lots of buyers, then those buyers would attract sellers, and more sellers would put on sale more products, and more products would attract more buyers. So the wheel would start to roll, but you needed the initial traction, right? So what we did was first put live a very basic piece of software that was very basic auction site software at the time. So it was just auctions, and we started collecting things from our houses. And from friends, etc., to put on sale because once the site was live. You had to populate it with items, right? Because otherwise people would go and see nothing. So we started doing that, and obviously what you want is overall liquidity in that marketplace. But to begin with, you need to start with something. And we focused on two categories that we thought were the ones that were going to somehow achieve liquidity faster. One was the collectibles thing. That was what eBay did in the US. So that was a community that was already trading quite actively, and the availability of a new platform was going to work for them. So we tried to look for stamps and coins and those kinds of things, old comics, those things that collectors would go after. And that category, slowly but still, started to emerge. And the other one was everything related to computers at the beginning. So that was the time of the XTs and the ATs. And you had to put together your computer, so you were buying parts and assembling them at home. So that was a quite active community as well of techie people that wanted to build their own PCs. And those two started to gain traction, as I was saying. As those two categories started to gain traction, more sellers appeared. More buyers followed. And slowly today we started to populate other categories, sports and electronics and cars, and eventually the marketplace grew quite significantly. But we had to make that initial effort. And another thing that we did at the time, I remember, was we looked for attractive items. What today would be maybe the latest iPhone at that time was the PalmPilot. You may remember it. So we would buy a few hundred PalmPilots and place them on the site or for auction at a base price starting at one dollar. So people would try to bid for it, and as more bidders appeared. The price went up, and maybe the market price for that PalmPilot was $300, and it got sold at $250, but with lots of activity in that auction. So that's how the business became somehow more popular, but it was a long runway before we could take off. Because the main challenge we had was that internet penetration at the time in Latin America was really, really tiny 2%, 3%, all of it was dial-up.

Pablo Strugo (00:12:26):
I remember in 2001, funny, so we moved away. I was born in '91, right? In '97, we came to Canada. I believe in, 2001/2002 is when I went back for the first time. And even, maybe it was 2000. But it was in those early 2000s that I was going to an internet cafe to chat with my friends right back. Somewhere between 2001 and 2004, that was the way I was accessing the Internet. You know, it was the odd uncle that had a computer in their house with access to the Internet. So I see what you mean.

Hernan Kazah (00:12:56):
It's funny that you mentioned that because now that I remember, one of the things we did was to go to the cybercafes and somehow try to put up posters of Mercado Libre and try to somehow engage the owner or the manager of those internet cafes so they would somehow tell people about Mercado Libre and all that. So it was really, really, really a long runway. But what we saw almost immediately from a tiny, tiny base was that the business was working. So one day it was three buyers, and the following day it was five, and the following day it was 10. Again, from a very, very, very slow base, but it always kept on growing. And that gave us somehow the courage to think that, okay, we're doing something that is working here. People are using it. We need to be very patient because it will take some time to gain critical mass. And as you know, in technology, critical mass, economies of scale are the name of the game. So we had to be very patient for that. But we could see that things were working.

Pablo Strugo (00:14:02):
You know, the venture landscape has changed a lot. And especially, you know, as a Latin American company, even today. Like the amount of venture capital available will be, you know, a small percentage of what's available to U.S. companies. You guys were from Stanford, though. So I guess I wonder in that time was particularly good time to fundraise. Did you raise before the like, the August launch, or when did you raise your first round of funding?

Hernan Kazah (00:14:23):
The funding of Mercado Libre had some important milestones. So, as I said, we took advantage of the bubble to fundraise. And that was a very small window when, even from Latin America, you could raise capital for a dot com.

Pablo Strugo (00:14:43):
Wow.

Hernan Kazah (00:14:44):
And that's how we took advantage of that phenomenon and raised the first round. But as most people did, we spent that money too quickly. As I was saying, the market was really small, but we went and tried to do things to attract more.

Pablo Strugo (00:15:03):
How much was that first round?

Hernan Kazah (00:15:05):
The first round was $7.6 million. It closed in October 1999. It was led by Chase Capital Partners. That then became JP Morgan Partners, and Union Square Ventures participated at the time they were co-investing with.

Pablo Strugo (00:15:21):
Oh wow.

Hernan Kazah (00:15:22):
Chase Capital Partners, so Fred Wilson also was part of that, and we had Hicks Muse, Dayton First. That was more of a private equity company investing more in media in Latin America. But somehow there was a connection with that fund, and they ended up investing. So that first round was $7.6 million. But very quickly, we spent all that money, and we're planning to go to the market in March 2000. But in March 2000, the Nasdaq started to go down. So initially, we drew lots of attention, and we had several investors interested in investing in the company and believing in the dream. And suddenly, as the Nasdaq started to go down, all those investors retreated. And every single day, there was one of them calling, Hey, remember that I told you I was interested? I'm no longer interested. And that happened all the way to the very last investor that was standing there that said, Okay, we want to have a call with you and discuss whatever. And we went into that call, trying to answer whatever question they may have. Still in the due diligence process, and they said, you know what, guys, we're basically withdrawing our term sheet, and we're not investing. So we thought, what the heck, the company will go down. And luckily, Susan Segal. 

Pablo Strugo (00:16:46):
How much runway? Do you remember, more or less, how much runway you would have had?

Hernan Kazah (00:16:50):
It was negative runway. We were already running on debt.

Pablo Strugo (00:16:52):
Oh, wow. Okay. You pushed it as far as you could.

Hernan Kazah (00:16:58):
No, by the time we had 200 employees, had spent more than those $7.6 million that we had raised. We thought that with a new round, we could somehow cover those costs and have extra runway. But Goldman Sachs was the one that was leading that round, said, You know what? I'm not investing in you guys. You know, wow, we didn't know what was going to happen. But luckily, Susan Segal, who was leading Chase Capital at the time, put lots of pressure on them. And somehow we ended up closing that round. It was a miracle. Believe me, it was a miracle.

Pablo Strugo (00:17:36):
It's the best choice they ever made. That's for sure.

Hernan Kazah (00:17:38):
No, and it's funny because it's one of those games that if you play that game ten times, you lose nine, but we won. And so we ended up closing that round. And I think the fact that we closed the round with so much pressure. So much, it was a dire situation, right? So really tough. We thought we were shutting down. We thought we were with debts up to here. So the fact that we could close it made us realize that things somehow were going back to normal. And that cash was again a limited resource and that we had to start planning our business plan in a different manner. And very quickly we realized that and ended up deciding, okay, with this money. We're going to have a very long runway. If after that long runway, we don't make it, okay, fine, we fade. But we're not going to put ourselves between a rock and a hard place just because of overspending. And that was a mental shift that was very important for me.

Pablo Strugo (00:18:47):
How big was that round, by the way?

Hernan Kazah (00:18:49):
That round was like $46 million.

Pablo Strugo (00:18:51):
Okay.

Hernan Kazah (00:18:52):
Into the bag we ended up getting probably less than 40% because of the debt we had. But with that capital. That capital came into our bank account in May 2000, and we went public in August 2007. We're still probably a quarter of that round in the bank. So we clearly understood that we had to make that money last. That we had to build a business, investing in the business, right? So we knew that we could not make it profitable. One day to the next because, by the way, at the time we raised that round. Our service was free. So there was no way to make money. But we knew that eventually, because traction was there, we could slowly but steadily build a business. So we went into first of those 200 employees that we had. We reduced to 100. Then we started reducing lots of expenses that did not make sense for the size of the business. For the size of the market at that time. And we changed. Also, our somehow mentality and focus much more on technology. So this has to be a technology company, and technology has to drive activity. Has to drive traction. And also all marketing went into organic sources of traffic, or at the time Google started to gain traction in the region. So we became the first and only customer of Google in Latin America for a year because they didn't pay attention to Latin America. So we went to Google and told them, Hey guys, we want to buy all your traffic in Latin America. No, we don't have traffic in Latin America. Believe me, we do. We'll buy it all. And we bought all their traffic, and then very quickly we went into SEO. That today sounds like ancient strategy, but at the time was very relevant. So with that, and also an affiliate program that we had. We started to have really great sources of traffic, of traction that were organic or very accretive in terms of ROI. And very focused on technology, on building a great product. But it took a while. It wasn't until 2005 that we could finally start producing significant revenues to pay for our expenses. But remember that at that time. When we saw light at the end of the tunnel. We decided, okay, let's invest again more aggressively on the business to be profit out in a year. But with a higher revenue level, right? And we ended up being profitable in, end of 2006. And we went public in 2007 as a profitable company.

Pablo Strugo (00:21:37):
You were doing how much revenue, more or less, when you went public?

Hernan Kazah (00:21:39):
Yeah, so the full year of 2007 was $78 million. The prior year was something like $50 million. And then the company kept on growing. And today it's billions, right?

Pablo Strugo (00:21:54):
Well, it's, you know, that's it's a funny time. I want to go back to the story, but it's a funny tangent. I'm just thinking about those numbers. And they're obviously super impressive just in general. I mean, you're talking about eight years to 70 million, but they're not, you know, these days we're talking about zero to 10 million in a year. You know, they're not insane growth numbers. And yet today it's a hundred billion dollar company. Which to me, this is just something I've been thinking about a lot. Like, it really is that consistency, you know, like everybody's obsessing about who's the fastest zero to a hundred million company. And you see those charts all the time. I'm sure you see them as well. And yet you look at Mercado Libre, a hundred billion dollar company today. It probably wouldn't have made any of those charts. Frankly, it just never, it never stopped growing. Right. 20 years later.

Hernan Kazah (00:22:38):
No, it's exactly what you're saying, Pablo. And it's interesting to look at it because, first, as you said, the company did not have that hockey stick that you always read about in Silicon Valley and those things. Why we believe that? Because we had to wait for the market to develop. The market was not out there ready for us to grab it. We had to wait until people would go online. Until people would go to online shopping. To people move from dial-up to broadband. So it was a long process. So we could not grow faster. And I remember that we had Bergoglio ended up closing a deal with eBay, and eBay became an almost 20% shareholder of the company. And we had several conversations with them, and they were saying, Guys, you're progressing really well and moving in the right direction, et cetera. But when we were in year three, we're growing at 300%. And you guys are growing at 80%. And when we were at year four, we're growing at 250% and you guys are growing at 80%. But the company kept on growing at that pace. For more than two decades. And you know the compounding effect of that, right? And then there were a couple of, I think, inflection points. One was mobile, was a revolution globally, but more so for Latin America, because that basically was a region that was growing in terms of internet penetration and was growing from dial-up to broadband. And suddenly, a significant portion of the population had a mobile device connected to the web with a decent broadband connection, 24 by 7. And that really skyrocketed everything.

Pablo Strugo (00:24:32):
In those developing countries. I guess a lot of people never had, like here, you know, people usually went, you know, PC. PC with internet, mobile phone, right? But in developing countries. A lot of people just kind of leapfrogged that, and it was just like nothing. And then all of a sudden, mobile phone. And so those numbers completely changed.

Hernan Kazah (00:24:46):
You're absolutely right. There was a significant leapfrog, and many people went into digital because of a mobile phone. They didn't have all that kind of intermediate stages that you were describing. So that was one significant inflation point. And the other one was the pandemic. Because that was when, a couple of years before that. I don't remember exactly that, because at that time I was no longer with the company. I already followed it closely and remained very close to the team. But Mercado decided to start doing their own logistics. For a long while, we said we're not going to touch products. We are a software company. We connect buyers and sellers. We're going to provide lots of services. So the experience is great, but we're not going to touch the package. And then the company realized that, given the level of service they wanted to deliver, they had to also get involved into logistics. So they started delivering logistics. And when the pandemic hit, basically Mercado was the only available solution and the only scalable solution because what they had built to address the logistics challenge was big enough to really be able to support the growth that they had in demand because of the pandemic and the lockdowns and those kinds of things. And that was another inflection point. But as you well said, the company is still today, 25 years after its beginning. The company is growing at 80% or 70% year on year. So when you look at. 

Pablo Strugo (00:26:18):
Crazy.

Hernan Kazah (00:26:19):
A similar business, they grow much faster initially. But then they go quickly to 20-25% growth rate. Which are great, but nobody keeps on growing at almost triple digits 25 years later.

Pablo Strugo (00:26:34):
What explains that? Like in your mind, and having been so close to it, you know, in those formative years, what do you think explains that? Obviously, like, in a sense, that's what everybody wants, but very, very few people end up getting.

Hernan Kazah (00:26:46):
I think, on the one hand, the e-commerce platform has more significant value in Latin America versus places like the U.S. Because in the U.S., okay, you have Amazon, which is terrific. But you had Walmart, and you had other offline retailers that would offer a very decent service, right? In Latin America, there was a much larger, bigger gap, wider gap. So the value that Mercado ended up bringing was much larger. And then on top of that, Mercado Libre created Mercado Pago. So the digitalization of payments not only was great because it made payments for e-commerce transactions easier. But it also started to basically create financial inclusion for people that were left out by the traditional banks. So again, it was, so that combination and then on top of that.

Pablo Strugo (00:27:45):
How does that? How did that work, by the way, Mercado Pago?

Hernan Kazah (00:27:48):
It's amazing. In Argentina, it's probably the number one means of payment by far. In Brazil, it is very significant. You carry your cell phone, and you have your Mercado Pago wallet there. And you pay everything from the bus ride all the way to your shopping at the supermarket, whatever you want to do. It's really amazing. Then on top of Mercado Pago, they launched Mercado Crédito. You have also a financing business on top of it and what I was describing about logistics. So today it's really incredible. The market share that Mercado Libre has probably is larger than the market share of Amazon in the U.S.

Pablo Strugo (00:28:31):
It sounds like at a high level. Similar story to the layering on top, right? I think about Shopify's business with Shop Pay and shop financing and a bunch of other things of doing that logistics. Alibaba as well, which I'm less familiar with, but at a high level. I think kind of structuring a lot of these things on top of each other. And you know, as I hear you talking, like one of the things that strikes out at me is you kind of mentioned this, right? But is waiting for the right time, like not staying alive. But, you know, doing well. But not trying to, kind of sometimes you want to pull the market forward, right? Like you want that 300 percent growth, and you know that, say, logistics is one of the barriers. But if you do that too early, you might not survive, you know, the time when you really needed it.

Hernan Kazah (00:29:15):
No, you're absolutely right. I think one of the things that Mercardo Libre did really well was to say no to a temptation of doing too many things at once. So the company waited until the e-commerce platform was somehow consolidated. And it was evident that we needed payments, and then we launched. So Mercardo Libre was launched in 1999. Yeah, payments, we launched it in 2003-4. So a few years later, and logistic as I said, came 20 years later, almost. And Mercado Crédito, so the financing business came probably 10/15 years later. So the company really waited for the right time. But once they launched it, they really went for the kill, right? They had an amazing solution. That was basically a category killer in a way. But also started bringing people into those markets that, for them, was the first time. As much as for them, the mobile allowed them to do e-commerce for the first time. Mercado Pago allowed them to have a bank account, a digital bank account for the first time, and maybe with Mercado Crédito they got their first credit ever.

Pablo Strugo (00:30:31):
Did you, before that, by the way, before Mercado Pago, maybe in the early days, actually going back, how much of this was? We take things for granted, right? In North America, like, you know, credit cards, how much was it? How did people buy? Was it all digital, or did you accept? I know, for example, Rappi. I spoke with one of the founders. I mean, they were accepting cash in the early days of the couriers. Is that did, you guys do that as well?

Hernan Kazah (00:30:52):
So the first transactions in Mercado Libre, the first, I mean, the first three years of transactions, were cash on delivery. And slowly but steadily, we started doing Mercado Pago. And by the way, what was interesting was that Mercado Pago was in the initial business plan that Marcos developed in Stanford, right? So it was there, but because of complications with how to launch it, et cetera, and some kind of a gray area in terms of how that was going to be regulated, we postponed the launch. But it ended up being launched in 2003/2004, as I said. But it was always there, but it was there more as a safety mechanism. Because, hey, you're buying something that you haven't seen from a stranger, so let's provide an escrow service that brings extra safety to the transaction. So you, Pablo, are sending something. I don't know you. By the way, I don't see you because you are in another city. So you'll send me something, and I will pay first to Mercado Libre. I will hold that account, that escrow account. And once I say I'm okay. What Pablo sent is what I bought. Great, they will release the money to you. So it was thought with that idea. But almost immediately, users started using it because they could have a digital means of payment. And they could somehow finance it through credit cards. The purchases, or maybe the sellers, could accept credit cards or debit cards that could not accept by themselves. So very quickly, the escrow thing was a marginal benefit, but the fact that you had the capacity to have digital payments was amazing. And today nobody realizes that somehow it still has the escrow component because it adds an extra layer of safetiness to a transaction. But it's all about the capacity to transact more easily.

Pablo Strugo (00:32:52):
You love this show. You don't want to miss the next episode. Why would you? So hit that follow button. Trust me, it's in your own best interest. By the way, going way back in the timeline, one of the things that's just in the back of my head, but we're just on tangents, is you said you started in '99 and then by March you had 200 employees. So, like, in nine months or so, six/nine months, you went from five people or something to 200. Walk me through that. How does that even just? Like, physically, how do you do that?

Hernan Kazah (00:33:17):
Yeah, two things. One is, as I said earlier, technology businesses are all about economies of scale. And we knew that given the low level of internet penetration that we had in the region, we could not survive with one single country. So very quickly, Mercado Libre, we started it in Argentina, but a few weeks later, it was present in Argentina, in Brazil, in Mexico, in Venezuela, Colombia, etc, right? Why? Because we wanted to gain critical mass, and the only way we thought it was possible to gain critical mass was by participating in several countries, because with one single country we could not make it. And once you start opening.

Pablo Strugo (00:34:05):
Actually, walk me through that. Maybe we'll go to that. But I'm actually curious on that because some people would say what you should do is focus. You should take Argentina. You should get critical mass. Even if it's non-scale, get critical mass there. And then when you prove it out, add all these other countries. I'm sure you thought about that. What were kind of the pros and cons? Why did you decide to go this other way?

Hernan Kazah (00:34:23):
Yeah, I think maybe we could have gone just to Brazil. Which was the largest country, and if we remained focused on Brazil and the business grew relatively well in that market. Maybe we could have gotten to a decent scale. Decent critical mass just with Brazil. But it was one bet, right? We didn't know if that was going to work. And all the other markets at the time were really tiny. So we needed to be present in several other markets. By the way, the technology platform was basically the same one. And then we had kind of a different fronting for Argentina and for Brazil. And obviously, the transactions were happening within a market, within a country, not cross-border at the time. But there were some economies of scale of doing things for lots of countries instead of just one. So we focused on that. So that was the positive side of it. By the way, today, as investors. When we invest in a company. We tell them more of what you were saying. That is, hey, focus first on the market. Make sure you have product market fit. Make sure that you know you have a winning formula. Maybe you don't have it entirely developed, but you do know that this is what works. This doesn't, and then you start expanding. Expand from a position of strength, not a position of weaknesses. But again, at that time, I think that was the right strategy. But what we did not do that right was that because we're opening offices. We started to create teams in every single market, and one person brings two. And two people bring three, and you know how it is. And suddenly you have 200. And then when we went back to 100, et cetera. We concentrated everything, and we started to have one single team for almost everything. So one marketing team to do marketing across all the countries and one customer service team to serve customers in all countries. And obviously one technology team. That was always the case. So we started doing that. But yeah, we went off-board in terms of the number of people. Unfortunately, it was our mistake, right? We hired lots of great people, but we had to let half of them go because of our over hiring.

Pablo Strugo (00:36:46):
This is maybe a bit of, I mean, it is a hypothetical. Maybe it has no right answer, but I'm curious what you think. Like you ended up cutting your team from 200 to 100. Mainly because of the macro conditions and the reality that, you know, things got a lot harder. And so you might not, you know, who knows when you can raise next. But could, you know, let's say that didn't happen. Like the macro didn't happen. The money still came easy. You raised that round, and you didn't. Do you think Mercado Libre would be where it is today? Do you actually think cutting back was ultimately a strength and maybe even a reason? Because I can only imagine going from 500 to 200, keeping the culture, and if things keep going, now you're at 400, not too far after that. I guess my mind is going to. I wonder where that path might have led to.

Hernan Kazah (00:37:29):
Yeah, you know, that it's very hard to do those counterfactual. 

Pablo Strugo (00:37:32):
Yes.

Hernan Kazah (00:37:33):
Exercises because you're contaminated with what ended up happening. But I think that going through harsh moments for fundraising and realizing that the market was really tough going forward. And that capital was not going to be available, etc. Created the right culture in the company. And that made us focus a lot on technology. Made us focus a lot on organic ways to grow. Again, we really focused on gaining financial independence. So we said, you know what, we're never ever going to find ourselves in a rock and a hard place. Let's make sure we have enough runway to end up building the business we want to build and not that we are going to beg investors for extra money. So I think that it certainly influenced the company's culture the right way. If that hadn't happened, who knows what would have happened, right? It's tough to know. But I can tell you that when we launched Mercado Libre, we had many competitors, dozens of competitors.

Pablo Strugo (00:38:41):
Huh, interesting.

Hernan Kazah (00:38:42):
Some of those raised significant capital, but all of them raised the second round before the crash. And they kept on spending, believing that, okay, the market is down, but then it will go up again. And because they didn't go through such a dire moment of believing that the company was going to go under. We're on a more relaxed situation. Maybe they reduced the employees from 200 to 150, but not from 200 to 100. They did not reduce marketing 90% as we did. They reduced 20% from 100 to 80. So they were doing marginal adjustments, and they all ended up dead.

Pablo Strugo (00:39:24):
This is an interesting thing. I didn't realize that there were so many competitors back then. How do you compete with them while trying to, you know, be more efficient? Like, it's one thing if you're the only player in town. You just, you know, you advertise a little less, you ignore some different parts, you know, whatever, you kind of figure it out. Maybe you grow a little slower to result. But because sometimes what people will say, and it happens a lot these days. Certainly happened like in the, you know, the marketplace era. You have to play the game on the field. Yeah, sure, you want to be efficient. You don't want to spend a lot of money. But if your competitors are doing that, then you kind of have to. How did you handle it at that time?

Hernan Kazah (00:39:59):
Yeah, I think that there were three phases. Phase number one, the good days of the market. So we were all raising, investing too much. I think within that craziness, we were a little bit more moderate. Still investing much more than what we had to, but more moderate versus others. And there were others that were doing mass marketing in a better way than us. So in terms of branding things and placing the brand in the mind of the consumers with, I think, with a stronger impact. The fact was that then, of a hundred consumers, only two or three were buying in the entrance. So was it worth the effort? Was it worth the investment? Probably not, but they were more successful in establishing top of mind. Then the crisis hit.

Pablo Strugo (00:40:51):
By the way. Curious on that, actually. What were some of the things? Because I think here maybe people might have sponsored. Like the Super Bowl, you know, back when nobody else could buy. What were some of the things that they were doing then?

Hernan Kazah (00:41:00):
No, not too different to that.

Pablo Strugo (00:41:02):
Right.

Hernan Kazah (00:41:02):
So people doing placing boards during soccer matches and those kinds of things, or TV ads on open TV. And again, only 2, 3, or 5% of people have access to the internet.

Pablo Strugo (00:41:17):
It's a tough formula.

Hernan Kazah (00:41:19):
So that was the first part. The second part was we realized that the market had changed. We ended up raising capital. We did have capital in the bank. So did some of our competitors because they were spending but still with capital in the bank. And that was. I'd say the toughest period. Because we were saying, Hey, now we have to cut down expenses, reduce the team, and cut down marketing by 90%, literally by 90%. And most of the team were saying, Hey, are you crazy? You've just raised. Invest more now. Look at these other guys that are outpacing you. They're winning. And it was true in terms of talk of mind during the following month. They were ahead of us, but we knew that the name of the game was different going forward. and that they were not going to be able to race and that we had time to build. By the way, building really meant building a great technology platform, not having top of mind. So we really did lots of work under the hood, preparing the engine and making sure that the engine would run faster with lots of autonomy, etc. And the others were painting the car and putting nice stickers on the windshield. And those stickers were nicer than ours, but it didn't last. So that was a period of lots of discussions and tension because the market, the general population. Even our employees were saying, Hey guys, you're crazy. You have to spend more. You have to invest more. We're going to be outrun by these guys. They will run over us. And then obviously when.

Pablo Strugo (00:43:56):
How did you? Well, let me dive into that. Because this is the critical part, right? I think, at least, like, if you get this right. And how do you? Maybe give me more insight. Two things, I guess. One is just the sort of, you say you build a lot in the engine. Like, what sort of things are you investing into? Maybe the bigger question, though, is. Well, let's start there, actually. Let's do one question at a time. Like when you're saying they're paying the car, they're doing marketing and stuff. What are some of the things that you're focusing on, and why do you choose those things?

Hernan Kazah (00:43:21):
So we've started focusing more on growing the technology team or making sure that we had the right technology platform. Really building on, first, trying to make the site stable, because at the time it was not stable at all. Second, start adding the kind of features that the market needed, that buyers and sellers were requesting, et cetera. And then create all this engine for growth to come from ROI. Reasonable sources, right? Because before it was, the ROI was terrible, terrible. It was again shooting with a bazooka to a fly, right? And it made no sense whatsoever. So we had to really start focusing on things that would bring those users that were already online onto Mercado Libre. And then convince them to start transacting. It was no longer saying, Hey, I'm going to, with a gun machine, trying to kill anyone. It made no sense. We had to go with laser focus on those guys that were already active on the internet and move them on to Mercado Libre. So we started building all that, and it was working. Again, the company was always moving up and to the right. Always, always, transactions never, ever stopped growing. We didn't have anything like seasonality for, like, I don't know, 10 years, you know. Christmas season is the peak, but then January was higher, you know, because more people were joining the wave of the internet. The wave of e-commerce, and we were somehow serving them well. So that was what was happening, but we had to be patient. And we had to basically let go of the anxiety of reacting because the competitor was doing something that at that time sounded louder.

Pablo Strugo (00:45:11):
So then that's my second question, which is when you're having those conversations. Because I'm thinking you're a founder, right? Like, you're probably, number one thing that scares you if you're in that phase is, you know, running out of money and failing for sure. But then the second thing is being outrun by your competitors. You know, it would suck to have the right business model at the right time. And because you're too fearful, let's say you end up, you know, 10 percent as big as the competitor that was more bullish. You know, how are those discussions happening internally? And how are you so, let's say, sure? Maybe that's not the right word, because I don't know how confident you might have been at the time. But like, so, clear-cut in saying, no, no, I know they're doing all this stuff. I know it looks like they're winning, but trust me, this is the way forward.

Hernan Kazah (00:45:54):
Sure, we're not, right? You're never sure. We're confident. Confident that that was a right strategy. First, I think that fear of running out of money was so deep. So harsh, so painful, that it basically outweighed any fear of competitors, maybe. So we really suffered that firsthand and big time. So we thought the government went under. We saw it. It was like, Hey, this is what's happening. So that, I think, in a way, affected us. Transformed us very deeply. But the second thing was that. Trying to take a step back and say, okay, let's wait. What do we have? We have nothing. We had raised first seven and a half million dollars, then $46/47 million. And our revenues were zero. So you start to become kind of humble and say, Hey, look, the pizza place at the corner makes much more money than us. A national company, a tech company, we go and talk to investors. So you start kind of getting some reality checks. And you do the same thing with the competition. So is the competition outpacing us because they are making money? No, they're not making any money either. They just have more users. By the way, users, we have 10, and they have 11. You know that we have 10 and they have 10 million. You start kind of realizing that the name of the game is long-term, being patient, and building things that last. And again, we were quite confident after we went through that painful round that that was the right strategy and that time was going to validate our strategy. Had the market come back, and suddenly our competitors would have raised much more money. Who knows what would have happened, but we thought that was very unlikely.

Pablo Strugo (00:47:56):
And so what was phase three then?

Hernan Kazah (00:47:58):
Pardon?

Pablo Strugo (00:47:58):
Phase three, you mentioned phase one. Phase two, which was all this, and I just asked a bunch of questions that took you off here.

Hernan Kazah (00:48:03):
No, I know, and phase three was. It became evident that we were basically the only game in town. Because all the other competitors ran out of money or had very little money. And we kept on investing on those organic engine that we had built that, by the way, the competitors did not. So we were very successful there, and we kept on growing, growing, growing. And our technology, slowly but surely, became much better than that of the competition. And it was working. And then we became market leaders, and all the others basically died. And we ended up buying a few that remained around for small amount of money.

Pablo Strugo (00:48:38):
So let me ask the kind of three questions we always end on. And then I'll ask you a few questions now that are more about the because now you've been on the VC side now for a while. And I'm just curious to get your thoughts on a few things. So maybe just the first question, just on Mercado Libre. When was a time that you personally felt like you were a true product market fit?

Hernan Kazah (00:48:56):
True product market fit, probably when we became profitable. I think at the end of 2005, as I said then, because we got there. We re-accelerated investment because we realized that the market was there. But the moment you go to sleep at night with $1,000 in the bank and you wake up the following morning with $1,001, it's, wow, this is working. This is working. So that was true product market fit. Since the beginning, we saw transactions happening on the platform. So that was, were we creating liquidity for buyers and sellers? Yes, we were. The question was, is the market willing to pay for that liquidity that we create? And that required some time, right? Because you know how it is. When it's a free service, people are happy to use it. But then you start charging a cent, and then most people should say, Hey, I'm not interested in that service anymore. So we had to really, so I think that the moment we became pro, that was kind of, woo, terrific relief.

Pablo Strugo (00:50:04):
What, having been through what you've been through and again now working with founders every day, like what are some of the most common or maybe the most common piece of advice that you find yourself giving early-stage founders specifically, like in that zero to one phase?

Hernan Kazah (00:50:17):
I think a lot of what we discussed today. One is focus obsessively on finding product market fit with your core solution. Because what happens with entrepreneurs is you become an entrepreneur because you are impatient. Because you want to do many things. You want to move forward. And that is amazing because that makes you move forward and do things and dare and do things. But at the same time, sometimes it plays against you because instead of finalizing the solution you're building for problem one, too quickly you want to move to problem two or problem three. And you know what? You only create value if you're amazing at something. You really need to be excellent at something. If you're okay doing many things, it's hard to create significant value. And what it takes for a solution to be 95% ready or 100% ready is an Everest. It's very significant. And the temptation of a founder because of their character and their personality is to move to the next one. So maintain focus there and then try to build solutions based on technology based on things that you believe are somehow sustainable. This is technology, so it's very dynamic, and nothing is sustainable forever. But at least make sure you have an edge versus your competitors or that you're building an edge versus your competitors. And not that it's something that anyone can copy, and the minute after they are at the same level you are. At least it should be below your level, and hopefully that gap allows you to react. And hopefully remain ahead of the competition. So really focus on technology, be patient, and try to build sustainable competitive advantages.

Pablo Strugo (00:52:06):
Perfect. And then moving to, you know, you've been a VC now for how? When did you start Kaszek Ventures again?

Hernan Kazah (00:52:12):
In 2011. So now I have more years as a VC than as an entrepreneur.

Pablo Strugo (00:52:16):
Incredible. And what, you know, the question I want to ask you is, you know, a lot of people compare this way of AI to the internet. You've lived, you've lived both. What do you think?

Hernan Kazah (00:52:26):
I think it's incredible what is happening. I think I professionally went through three big revolutions. One was the internet revolution, the one we discussed in the early days of Mercado Libre. The second one was the mobile revolution, which for Latin America was really transformational. It was the inflection point. If you look at all of our businesses, Including Mercado Libre. But all the businesses we invested in, you can see that they were growing at one rate. And after 2010, '11, and '12. When really mobile penetration kicked in, they went to a different growth level. So that was transformation, and now AI. I think the big. Big difference is, on the one hand, I see AI is incredible. It's basically influencing every single thing we do. It's like from editing a podcast all the way to how you write an email, all the way to how you assess creditworthiness for consumers. So it's really, really across the board. So mobile was transforming a few things. And the internet a few things, but this is across the board. The difference is that it's not offering a new distribution platform, right?

Pablo Strugo (00:53:44):
Yes.

Hernan Kazah (00:53:45):
Internet was a new distribution platform. So you were offline, and suddenly you're online. Mobile gave you the opportunity to be on a mobile. Which was a device that you carry with yourself 24 by 7 almost. So it was a new distribution. By the way, the web solution was not necessarily the mobile solution. Though you had to build an app, etc. And here, that distribution factor doesn't seem to be so evident, even though there are some companies that are exploring. I don't know, ChatGPT or Perplexity or those kinds of solutions, as we used to treat SEO at the time, right? So it's like, hey, people do searches there, and they start their experience there. So if they find you in that platform, maybe they end up using you. So let's see what happens. But I think it's less of a new distribution.

Pablo Strugo (00:54:38):
Yes, a hundred percent.

Hernan Kazah (00:54:38):
It's certainly more of a new technology that is working ridiculously well across the board. And by the way, we're just scratching the surface. So it's only a small fraction of what can be done with what is already available, not even what will come. So I think it's transformational, but the fact that there's no new distribution might give an edge to incumbents versus the new fold. But anyway, I'm very bullish. I think the net impact of this is going to be very, very positive for humanity in general. That many great businesses will be created by entrepreneurs that understand this better than you and I, and that's why you're starting a company and not chatting here on a podcast.

Pablo Strugo (00:55:27):
That's right, 100%. Yeah, the distribution point, I'll just say, it's the same observation I'm seeing. Which is, if you think back to the internet as a new distribution channel. It really levels the playing field. When Amazon launches Amazon.com. It's on a level playing field-ish, at least to like Walmart.com, right? You both start with zero visitors. You both have to go and get traffic. Yeah, one has a brand and all the other things that it has, but in terms of a website, your stance is still right? And same thing when you know in a way the app store comes, or whenever you launch an app. You know you've got to fight to be top of the app store just like anybody else. Today, there isn't that new distribution platform. And so if you have a million users already and you just add AI. You have a million users who have AI. Whereas if you're a new company. You got to go get those million users. So yeah, I totally get that point.

Hernan Kazah (00:56:16):
But in terms of the impact of producing the same with a fraction of a fraction of the resources you had to use before or producing a much better service, it's incredible. So I think the quality of the services and products we're going to get, and if you include in quality also the cost of producing that, it's going to be very positive, tremendous.

Pablo Strugo (00:56:42):
Perfect. Well, Hernan, thanks so much for coming on the show, man. It's been great.

Hernan Kazah (00:56:46):
Terrific. Pablo, thank you for having me, and I really enjoyed talking to you.

Pablo Strugo (00:56:50):
You remember, like, the first person who told you about Bitcoin, the first person who told you about Uber? You want to be that person because being first is cool. So be a cool person and tell your founder friends. Send it to them on WhatsApp. Put it in a WhatsApp group. Put it on a Slack channel. Let people know about the show. Let people know about this episode. Don't let somebody else beat you to the punch and share it with your founder friends first. Remember what Ricky Bobby said, if you ain't first, you're last.