Lessons from Mercado Libre
In the late 1990s, equity investor John Muse from Hicks Muse Capital was invited by legendary professor Jack McDonald to speak to the Stanford Graduate School of Business students.
After the talk and a generous lunch with professor McDonald, John Muse needed a ride to the airport to catch his private plane.
A young MBA student from Argentina volunteered to drive him back to his private plane.
He then proceeded to use the journey to pitch a business idea, and by the time they got to the airport where Muse's jet was parked, the private equity magnate had agreed to come on board.
The student is Marcos Galperin and the story of that car ride is the story of MercadoLibre, Latin America'a biggest tech company.
After that conversation, Galperin raised the rest of the round, moved back to Argentina, and in 199 MercadoLibre was officially launched from garage in Buenos Aires (yes, I know it's cliché).
MercadoLibre is an auction and e-commerce platform that facilitates transactions between individuals or businesses. The company has 6,000 employees, operates in 18 countries and posted US$2.3 billion in revenue in 2019.
Think a cooler version of eBay but in Latin America.
Earlier this week, MercadoLibre announced quarterly earnings with fantastic results, propelling its market cap to $37.8 billion.
Here's Spotify and Twitter for scale.
Europe looks at the US with a mix of greed and admiration and at China with a mix of confusion and fear.
But there's more going on, particularly below the Equator.
Today's Seedtable is on the lessons Europe's technology ecosystem can learn from Latin America's biggest tech company.
4 Lessons from MercadoLibre
Resiliency is a great place to start from
MercadoLibre is, above all, a story of resilience. Throughout its 20 years it had to withstand incredibly weak economic conditions and multiple strokes of bad luck.
The company launched in 1999, right before the global dot-com bubble bursted in 2000. Between the March 10 2000 and the end of the year, $1.75 trillion in value were completely wiped out.
But you probably knew that.
What you don't know is that that same year Argentina defaulted on its international debt, collapsing the local economy and forcing the then-President Fernando de la Rúa to flee on a helicopter in the process.
And there's more.
After 7 years of hard work and incredible growth, MercadoLibre was ready to go public on the Nasdaq at a price of $28.5. They picked August 9th 2007 as their IPO, exactly the same day analysts say marked the start of the global financial crisis.
Here's Marcos Galperin reminding you what happened that day:
"The day we IPO'ed was the first time – except for the 9/11 attack – the US, European and Japanese central bank had to intervene at the time time to provide liquidity to markets that we dropping disastrously. It was the start of the Lehman Brothers crisis."
But the team never wavered, and kept focusing on the central problem at hand – democratizing commerce and finance in Latin America. The stock is now worth $772.
In times of uncertainty like this, where the impact of COVID on the European economy is not clear, this lesson is as important as ever.
You can kill the fragmentation monster
The European Union is composed by 27 member states, 24 official languages, and 4,233,255 km2. No wonder why European entrepreneurs see the Europe's highly fragmented nature as one of the largest barriers to scaling a technology company.
MercadoLibre operates in 18 different countries in Latin America: Argentina, Bolivia, Brasil, Chile, Colombia, Costa Rica, Republica Dominicana, Ecuador, Guatemala, Honduras, México, Nicaragua, Panamá, Paraguay, Perú, Salvador, Uruguay, Venezuela.
Just as Europe, Latin America is a large, highly fragmented market across cultures, regulations and, sometimes, language. Brazil, the single biggest internet market in the continent accounting for 64% of MercadoLibre's net revenue, speaks Portuguese.
Nevertheless, the company was able to expand aggressively by focusing on a few key strategies:
Covering as many countries as possible as fast as possible and securing first-mover advantage. In 2000 it expanded into Brazil, then Ecuador, Chile, Venezuela and Colombia in 2001 and from there it was off to the races.
When securing the first-mover advantage wasn't possible, MercadoLibre resolved to acquire smaller local players to speed up geographic saturation. In 2008 they acquired deremate.com and Classified Media Group, in 2014 Portal Inmobiliario, a Chilean classified ad website and in 2015, Mercado Libre Metroscúbicos.com, the portal of Mexico-based real estate company Grupo Expansión.
Building local teams whenever possible. It has offices in Argentina, Brazil, Chile, Uruguay, Colombia, Mexico, Peru and Venezuela, allowing it to cross the bridge between cultures, languages and regulations.
This goes to show that expanding across geographies, even for complex, large-scale marketplaces that require geographic saturation and interact with local physical products, is certainly possible.
You don’t need to expand to the United States
One of Europe's obsessions is expanding to the United States. Founders (and funds) see America as the land of opportunity – an un-fragmented market with 350 million internet-savvy consumers and trillions of dollars in Enteprise budget ready to be captured.
It sort of makes sense. Europe is a highly fragmented market that requires companies to expand geographically to grow at the pace they need to grow.
MercadoLibre hasn't sold a single product in US soil. As we saw in a previous section, it expanded rapidly across Latin America, starting with Brazil then launching in Ecuador, Chile, Venezuela, Colombia.
But the United States isn't a stranger to MercadoLibre.
In 2001 and after a few years of brutal competition, eBay acquired a 19.5% stake in MercadoLibre in exchange for a non-compete agreement in the region and its Brazilian online commerce platform, iBazar.
This cemented MercadoLibre's winning position in the region, wiped out its biggest competitor (iBazar) in its biggest market (Brazil) and allowed the company to later IPO in the NASDAQ, New York's stock exchange.
In 2016, MercadoLibre opened a Research & Development center in the heart of Silicon Valley. The main focus of the team is to keep an eye on innovation and to contribute to MercadoLibre’s effort to open its platform by following Silicon Valley best practices.
This shows that it is possible to become a local champion by staying local.
You can build your way to success
Europe is, by all measures, a mature internet market with 727 million consumers, online banking penetration rates as high as 85% and a healthy online commerce culture.
The same isn't true for Latin America.
For perspective, Latin America has a population of around 640 million people, but has internet users and online shoppers of merely 362 million and 200 million, respectively.
As for banking, 30 to 50% of the Latam population over age 15 have an account with a financial institution, compared to more than 90% in countries like the US, UK, or Spain, or roughly 80% in China.
What was MercadoLibre's solution? In full @pmarca spirit, they started building.
The MercadoLibre marketplace has 274 million listings and powers 11 million active sellers and 44 million active buyers. Between them they transacted $2.4 billion in GMV.
But in a continent where banking penetration is as low as Joe Biden's energy, those payments need to be processed somehow.
So in 2003 they set out to build MercadoPago, a payment processor that today handles over 290 million yearly transactions. They also launched Mercado Wallet, effectively banking 8 million users.
Singlehandedly, they managed to set up a financial infrastructure that deals with local regulation and bureaucracy, improves online payment security, offer local payment solutions and alternative payments to tackle the low banking penetration rates all while dealing with multiple currencies, cultural preferences and local traditions
All those purchases done in MercadoLibre and processed by MercadoPago need to be shipped from A to B. So they built Mercado Envios, a wide logistics layer that powered 302 million shipments in 2019 alone. They now offer 1-day shipping on many products in a continent with an almost non-existing logistics infrastructure.
That's not all – they have Mercado Shops, with over 6,800 online shops and Mercado Crédito, with over $213 million in loans extended to buyers and sellers in Mexico, Brazil and Argentina.
The cool thing about a system like this is that these technologies are all linked together. Here's Jerry Neumann on the topic:
"An interesting thing about technological systems is that they are not just a bunch of technologies in the same place at the same time, they are systems: their further development is linked together. When some of the technologies in a linked system progress faster than others, the laggards become the limiting factor in the system. Thomas Hughes called these the ‘[[reverse salient]]’ with all that implies. The system can not progress until the reverse salient is cured, so economic resources are directed to its improvement. The invisible hand detects what is holding progress back and redirects resources to cure it, so the system evolves faster than its individual technologies would. If you see a reverse salient, you have found a problem whose solution is far more valuable than it may first seem." #[[The Deployment Age]]
MercadoLibre recognized a system that was failing and instead of waiting around for someone else (regulators or competitors) to fix it, they built a complete set of solution themselves.
Now they have in front of them one of the largest untapped markets in the world and not only they are riding the wave, they are building it.
That's it (for now)
With over 20 years in operation, there are many other lessons that we can draw from MercadoLibre.
- Capital efficiency. They raised 2 rounds for a total of $55 million in capital before they IPO'ed in 2007.
- Dealing with regulators. How MercadoLibre is doing a poor job at dealing with regulators.
- Dealing with inflation. It's not easy to operate in a country with 40% infation rates.
- Focus and speed of iteration. They launched in Portugal as a way to expand into Europe but quickly back tracked when they realized it wasn't a core competency.
I might cover them in the future but for now, but one thing is for certain: it's been an impressive run.
MercadoLibre started as a local marketplace for used goods and driven by the need for growth, became an international hydra driving financial inclusion in 18 different countries.