April 12, 2021
Kavak and Kavak Capital: Why it’s a Perfect Match for QED
Last week, Kavak, an online marketplace for used cars, announced its Series D financing, valuing the company at $4 billion and cementing itself as the most valuable startup in Mexico.
QED invested in Kavak early in 2019, which might not make sense on the surface since we tend to focus on finance and technology rather than selling Jeep Grand Cherokees and Volkswagen Jettas.
But there were two things that made the opportunity exciting to us as fintech investors:
- the lack of financing infrastructure for a marketplace like Kavak and
- the large financing gap in the auto market in Mexico (and Latam more broadly).
As a side note, there were, and still are, many, many more reasons to be excited about Kavak, but I’m just focusing on the fintech angles for the moment.
Kavak CEO and co-founder Carlos Garcia had a great quote in Techcrunch last week that more or less articulated part of our investment thesis in Latin America.
"When you’re building a business here, you need to build several businesses because so many things are broken.”
This realization has been the backbone of many of the massive businesses that have emerged in LatAm, including QED portfolio companies Nubank, Loft, Creditas, QuintoAndar and Bitso.
Pain Points
Financial infrastructure in LatAm has been massively under-invested. As a rule of thumb, we believe the market is 5-10 years behind the U.S. This means that the default customer experiences in financial services are long and painful. Think trips to bank branches, lots of paper and lots of waiting. Auto lending is no different.
Although some captive programs have made great progress, auto lending in LatAm is still a mostly paper-based process with manual underwriting steps throughout. Kavak is in the business of selling cars and providing an amazing, frictionless customer experience.
Solving the auto lending problem is solving the customer experience problem, so it's logical that Kavak has been focused on auto loans since the early days.
It was never a question of whether Kavak Capital was a part of Kavak's strategy; it was just a matter of when. Controlling the experience gives the best experience.
On top of this infrastructure gap, a large part of the market in LatAm does not have access to auto financing. Outside of new car loans, the majority of car sales are done in cash and the loans that do get done are at high rates at middling LTVs.
This gap is similar to other financing gaps in the region where lack of data, the prevalence of an informal economy and an inability to cost-effectively find and service customers keeps financial institutions from offering products.
Why We Invested in Kavak
If you’re going to revolutionize the car-buying experience and give more customers access to high quality cars, you have to solve the financing gap. It’s a virtuous cycle for Kavak: more financing equals more sales. And it’s great for consumers as well as it allows payments to be managed over time with income.
Put all this together and Kavak is the best fintech auto play in LatAm. Buying and selling high-quality cars with the best experience is the perfect lead generation for an auto loan. Collecting and analyzing all the car data makes for the best understanding of the asset. Monitoring and managing the vehicle over time is great risk management.
It’s no surprise that Kavak will soon be the top car loan originator in LatAm – both in terms of quantity and quality.
Last week, Kavak, an online marketplace for used cars, announced its Series D financing, valuing the company at $4 billion and cementing itself as the most valuable startup in Mexico.
QED invested in Kavak early in 2019, which might not make sense on the surface since we tend to focus on finance and technology rather than selling Jeep Grand Cherokees and Volkswagen Jettas.
But there were two things that made the opportunity exciting to us as fintech investors:
- the lack of financing infrastructure for a marketplace like Kavak and
- the large financing gap in the auto market in Mexico (and Latam more broadly).
As a side note, there were, and still are, many, many more reasons to be excited about Kavak, but I’m just focusing on the fintech angles for the moment.
Kavak CEO and co-founder Carlos Garcia had a great quote in Techcrunch last week that more or less articulated part of our investment thesis in Latin America.
"When you’re building a business here, you need to build several businesses because so many things are broken.”
This realization has been the backbone of many of the massive businesses that have emerged in LatAm, including QED portfolio companies Nubank, Loft, Creditas, QuintoAndar and Bitso.
Pain Points
Financial infrastructure in LatAm has been massively under-invested. As a rule of thumb, we believe the market is 5-10 years behind the U.S. This means that the default customer experiences in financial services are long and painful. Think trips to bank branches, lots of paper and lots of waiting. Auto lending is no different.
Although some captive programs have made great progress, auto lending in LatAm is still a mostly paper-based process with manual underwriting steps throughout. Kavak is in the business of selling cars and providing an amazing, frictionless customer experience.
Solving the auto lending problem is solving the customer experience problem, so it's logical that Kavak has been focused on auto loans since the early days.
It was never a question of whether Kavak Capital was a part of Kavak's strategy; it was just a matter of when. Controlling the experience gives the best experience.
On top of this infrastructure gap, a large part of the market in LatAm does not have access to auto financing. Outside of new car loans, the majority of car sales are done in cash and the loans that do get done are at high rates at middling LTVs.
This gap is similar to other financing gaps in the region where lack of data, the prevalence of an informal economy and an inability to cost-effectively find and service customers keeps financial institutions from offering products.
Why We Invested in Kavak
If you’re going to revolutionize the car-buying experience and give more customers access to high quality cars, you have to solve the financing gap. It’s a virtuous cycle for Kavak: more financing equals more sales. And it’s great for consumers as well as it allows payments to be managed over time with income.
Put all this together and Kavak is the best fintech auto play in LatAm. Buying and selling high-quality cars with the best experience is the perfect lead generation for an auto loan. Collecting and analyzing all the car data makes for the best understanding of the asset. Monitoring and managing the vehicle over time is great risk management.
It’s no surprise that Kavak will soon be the top car loan originator in LatAm – both in terms of quantity and quality.