Latin America is the perfect market for full stack startups. I’m convinced of it after living and working in Latin America for the past four and a half years and am even more convinced after having met, worked with and reviewed over 600 startups in the past year and a half as managing partner of Magma Partners in Santiago, Chile.
So what is a full stack startup and why am I convinced that Latin American entrepreneurs should be exploring full stack startup business models?
First, lets start with a definition. Chis Dixon coined the term Full Stack Startup in a blog post in March 2014. He says that a full stack startup is a “…complete, end-to-end product or service that bypasses existing companies.” It bypasses the old, existing hierarchy to be able to control the entire experience. According to Dixon:
Prominent examples of this “full stack” approach include Tesla, Warby Parker, Uber, Harry’s, Nest, Buzzfeed, and Netflix. Most of these companies had “partial stack” antecedents that either failed or ended up being relatively small businesses.
So why are companies following the full stack method instead of the old school method of partnering with large companies?
The problems with the partial stack approach include:
- Bad product experience. Nest is great because of deep, Apple-like integration between software, hardware, design, services, etc, something they couldn’t have achieved licensing to Honeywell etc.
- Cultural resistance to new technologies. The media industry is notoriously slow to adopt new technologies, so Buzzfeed and Netflix are (mostly) bypassing them.
- Unfavorable economics. Your slice of the stack might be quite valuable but without control of the end customer it’s very hard to get paid accordingly.
The full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide.
The three difficulties that Dixon explains are even harder to overcome in Latin America. Let’s unpack them one by one.
1. Bad Product Experience
Large Latin American companies generally have poor customer service and product experience because consumers don’t have many other options. Large companies are not generally motivated to improve their product, as they’re very confident in their market position. And if you are able to do a deal, you’ll be confronted with seemingly endless bureaucracy and conservative thinking that will water down the product to make it 10% as good as it could have been. What could have been a highly successful startup gets turned into a corporate innovation program that gets watered down and doesn’t succeed. I’ve seen it firsthand with three of my portfolio companies and heard the same story from countless Latin American entrepreneurs.
Latin America is an oligarchy. In some countries the best way to describe the business climate is that it’s a country club, if you’re in, you’re in, if you’re not, you’re in trouble. The general attitude of most powerful businesses is not to create value, but to extract as much value from whatever they can, whether its raw material from the earth, fruit from the land or money from people’s pockets.
Large, established, generally family owned, companies control huge swathes of the economy. In most countries, there are small number of cell phone companies that have more or less the same plans and prices. Latin American banks are the most profitable in the world (27.4% return on capital, compared to 14% in North America) and don’t really compete with each other. Most brands are sold by an exclusive distributor that sets the price and is nearly immune from direct competition.
In Chile, there are three large department stores that each sell to different target clients and don’t really compete on price. There are three large Chilean pharmacies that get caught price fixing every few years, pay a small fine, and go right back to it.
Most large Latin American companies aren’t focused on growing and innovating. They’re hoping to maintain their historical dominance and squeeze more money out of their clients. I’m not saying there’s no competition and that large companies are evil, but there’s much less competition than in the US or Europe. So when a startup tries to partner with an existing company, it usually doesn’t work because the large companies cannot or will not execute on the new opportunity.
2. Cultural Resistance to New Technologies
Large Latin American companies are almost always conservative. They’re not interested in new technology because they’re already profitable and confident in their market position. Most executives in large Latin American companies are not interested in trying new technologies. For example, if you pitched your product to an executive at a large US company and he passed on it and it would have solved a big problem for the company, he might get a bad performance review or even fired. He missed an opportunity to grow the business or streamline a process.
In Latin America, its the exact oposite. If you pitched your product to an executive at a large Latin American company and she passed on it and it would have been a huge success for the company, nothing happens. But if she had tried to implement a new technology and it didn’t work, she might get a bad performance review or even lose her job. There is a massive resistance to new technologies because companies put the fear of God into employees not to screw up. So they reject most new ideas out of hand.
3. Unfavorable Economics
If you don’t have control of the end consumer, you’re likely leaving money on the table. This is even more true in Latin America. Large companies are used to taking most of the value in a deal. If you’re a startup that creates $100 of value for a large company, the large company will want $99 and might agree to let you have $5 and think that they’re doing you a favor. (Unless you happen to already be in the upper class of a country (club), then you might get closer to $50. But that’s for another blog post).
Large companies don’t feel like they need to give you a fair deal because they know they are one of the only games in town. If I try to sell my product to a large retailer in the US and they try to take nearly all the value for them, I’ll go to their competitors, there’s hundreds of them. But in Latin America, there might be two or three per country. If you want to capture value, you may do much better if you’re a full stack startup.
If you are thinking of starting a business in Latin America or investing in a business in Latin America, I believe full stack startups should be your first choice. They represent a massive opportunity to disrupt undisrupted markets where the incumbents actively laugh in your face if you ask them about competition from startups. The market has been changing rapidly over the past two years, but I expect it to change even more quickly over the next five and large companies still don’t recognize the threat. I bet full stack startups will be the most successful startups in Latin America over the next five years.
What do you think? Do you have any examples of full stack startups in Latin America? I’d love to continue the discussion in the comments.
Cumplo is a peer to peer lending company like Lending Club. They could have partnered with a financial institution, but went out on their own and are finding massive success.
2. Propiedad Facil (portfolio company)
After running as a non full stack startup a year and a half Propiedad Facil became a full stack startup, bypassed the traditional players and went out on their own. They’re now growing 100% month over month.
Khipu is a payments processing company in Chile. Others have tried to break into the market, but, unlike most other competitors, Khipu designed an end to end process that bypassed the Transbank monopoly and allows people to pay using their bank account and merchants to pay lower fees and get their money faster.
4. Deenty (portfolio company)
Deenty started as Yelp for dentists. But they found that they could make more money by starting referring patients to their own dentists and have found product market fit.
The Warby Parker of Brazil. They recently merged with another Brazilian company and are growing steadily.