David Garcia of Digitt joins Nick to discuss Building the AMEX of LATAM, Raising a $50M Debt Facility, Why Leaders Should Tend to Flowers Not Weeds, and How Creativity Can Lead to 80% Organic Consumer Acquisition. In this episode we cover:
- Comparison to SoFi and American Express
- Business Model and Customer Retention
- Future Products and Market Strategy
- Debt Financing Process and Lessons Learned
- Customer Acquisition and Content Strategy
- Scarcity as a Superpower and Company Culture
- Mistakes in Team Management and Final Advice
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0:02
Nick, welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach convictions. Your host is Nick Moran, and this is the full ratchet.
0:18
David Garcia joins us today from Guadalajara, Mexico. He’s the founder of Digitt – building the modern day American Express for Latin America. Digitt has begun by helping prime borrowers in Mexico refinance their debt through affordable, flexible, and predictable loans. Digitt joins us following the announcement of their $50M raise of a debt facility that will turbo charge their growth and provide low interest refinancing to tens of thousands of consumers. Prior to Digitt, David founded two other startups including fraud protection-focused PagoSafe. David, welcome to the show!
0:56
Thank you. Nick very excited and very truly honored to be here, especially following guests that you have had that I deeply admired, FinTech legends like Frank rogman and finnappheim. So so very humbled to be here and looking forward to hopefully contributing something provided to your to your audience. Well, the
1:18
pleasure is all mine, and let me speak for a minute about why I’m hosting David on the show. So he did not ask for this interview. I asked him to come on. David is one of the most unique humans and most diligent leaders I’ve had the pleasure to work with. There is rarefied air of founders that every once in a while, VCs are super fortunate to invest in, and we are very lucky to have a handful of those in the portfolio. David is one of these people, and Sir, it’s a privilege to call myself an investor and to have you on the show today.
1:50
That’s very kind of you, Nick, and it goes both ways. I also will feel very fortunate to work with you and the new tech team. Awesome.
1:57
Let’s have some fun. So, you know, talk us through your backstory? How did you become a founder?
2:02
Yeah, of course. Well, long story short, I wouldn’t say it was one of those founders that had it very clear all of his life, like I wasn’t selling candy and elementary school or anything like that. I just a few years ago about 2000 I think it was 2014 2015, decided to quit my job. I was working for IBM back then, and I decided that I didn’t want to pursue the corporate path anymore. Quit my job. Just thought about building something. I tried to build a couple of things that didn’t work. And through that process, two things happened. First of all, I met Manuel, my co founder, and also during that process, I got very deep into credit card debt, spent all of my savings, and basically got in the situation that I’m currently trying to solve. I was paying a 70% APR to my vpba credit card, so it was very painful, and I thought that made no sense whatsoever. I had a very good credit score. I represent very little risk to the bank, but I was still paying this very high interest rate. And that was pretty painful and frustrating, of course, and that’s how we decided to do something about it, and found a digit.
3:12
Are there no usury laws in Mexico? No, no.
3:16
There’s no usury laws. So there’s one of that’s one of the factors that influence why we are paying these type of rates in Mexico.
3:23
Okay, so what are you building here? What is digit?
3:25
So we always think about digital as a modern day American Express for Latin America, but we specifically started by doing credit card debt refinancing. We’re offering credit card debt refinancing to prime borrowers in Mexico. We use that as our wedge to build a relationship with this very attractive segment that was being squeezed by banks. There are banks, cash cows in Mexico. They generate only, only for the top five banks. They generate more than $20 billion in interest revenue every year. But they were also being ignored by most consumer fintechs, who were mostly or which were mostly focusing on the unbanked segment of a population. So So basically, we direct customers with good credit scores for all jobs, predictable and above average income, and in Mexico, even those customers pay interest rates between 70 and 150% in credit cards and most consumer loans, even though they represent very little risk. So basically, we help them pay off their expensive credit card debt. We offer them a lower rate, a fixed installment loan. We directly pay off their credit cards, and we build a relationship with them that way. Yeah,
4:34
there were a lot of solutions on the market that were focused on sort of down market, underbanked, unbanked folks, subprime folks, you went after more prime level consumers. How big is that segment in Mexico?
4:49
I mean, it’s very big. It’s very significant about 30, 35% of the population in Mexico has access to credit products. Of course, when you think about. It that way. You think that the other 70 or 65% seems more attractive, but the ones that actually generate these huge profit pools are these customers that have or require higher loan amounts, generate a lot more revenue, represent a lot less risk for financial institutions. And as I mentioned, these consumers are generating, like the top five, five packs in in Mexico are generating more than $20 billion per year in interest revenue only from from from the retail books. This means this excludes even mortgages. In most cases, it excludes car loans and stuff like that. So it’s a very significant target market. I
5:40
remember when we first met, you know, and I looked at your deck, I thought of you as effectively, like a SoFi for Mexico. You know, you were really refinancing a lot of very high interest consumer debt in a similar manner. But you’ve said to me that you’re building the AMEX for Latin America. So what? What does that mean? Exactly,
5:59
yeah, I mean Sofi, it’s a great example, and I and SoFi is a company that we follow, and we’re also very lucky to have a former president and former CFO of SoFi as an investor and very close advisor of a company. And sofa is definitely a great example. But Amex business model just I think it blows my mind. Amex customers spend 3x more than any other of their credit card peers or credit card issuers, while at the same time have a lowest loss rates in the market, lowest than JP Morgan, Bank of America, of course, lowest lower than Capital One or discover. So what that results in that you have a customers that generate the most revenue by this higher spending, but also you have lowest losses on the market, so you have better margins and and for that reason, investors are willing to pay much higher multiples for America, express, than, than, than for Most of your other peers, of their peers, and so that’s why we decided to focus on the this segment that in the very same in a very same way, like require much higher loan amounts. When you think, for example, of Nubank, which is, of course, an amazing company, but they generate about nine, eight or $9 per customer per month in their Peri cohorts, and we start in our case, it’s closer to $40 per customer per month at the very beginning, and we also have much lower loss rates, around 2% today. And so that results in very strong economics and also allows us to build a very loyal relationship with these consumers that we intend to grow through additional financial products, and that’s one of the key components of why we want to give the next American Express for Latin America.
7:49
So, you know, part of the strength of the business model of Amex is that they’re not just monetizing on interest rates, right? There’s fee based streams. There’s other structural advantages that give them a much better multiple for their enterprise value versus some of these other financial players. I’d like to hear more about the mechanics of the business model a digit, you know what? What are you doing today? What’s the breakdown of take rate, etc, and where might the business model take you in the future?
8:19
Yeah, of course. So yeah, currently we only charge our customers our simple interest rate. That’s our only our own revenue stream. Because we also identified that transparency was lacking for financial services in Latin America, many companies, not only banks, have a lot of hidden fees and stuff like that. That really makes things, make things complicated for consumers, and we decided to get rid of that. And then we, of course, the business slicing our how high our cost of funding is, how high our losses are. And the magic today is that we have been able to grow the book significant, significantly, without compromising the quality of our portfolios. We have very low loss rates, as I mentioned. And what that results in is that even today, for example, we have a very like a comparable risk adjusted margin to like of new bank, which, like they, have a much lower cost of funding given their scale size that they are now issuing or offering checking accounts, stuff like that. But we end up with a very similar risk adjusted margin because of our of how low our losses are, and then beyond that, I think the most important thing is and actually replicating nubanks playbook to keep loss cost to serve as low as possible, so making or Building a very efficient operation through the use of technology, and then transferring those efficiencies to consumers in the in the in the form of fair interest rates, right? So it’s how we get to build a very profitable business while at the same time offering very attractive rates to our consumers, so
9:56
loss ratios are low, right? Naturally, you’re focused on prime. And borrowers so low single digits. What about customer retention and customer churn? You know, you do have some cohorts that have some time on them. Do you have a sense for how long you expect customers to stay with you and what typical churn looks like? Yeah,
10:17
of course. I mean, I think debt refinancing is an amazing wedge. It allows you to attract the right set of customers. It has a very strong component of positive selection. We bring in those high quality customers. But there’s like an inherent effect of refinancing, is that to some extent, you turn your best customers if you don’t have an initial product to offer them after a refi so but still, 25% of our new loan regeneration every month comes from recurring customers, customers who either are looking to refinance a second grade card debt, customers who even like 912, months later, rack up some debt again, and so they’re looking to refi again, but they keep Very healthy levels of debt, and they have very stable ability to pay and stuff like that. But now I think we’re ready to move forward and start offering additional financial products to our consumers, products that actually have more retention. We first wanted to make sure that we had built a very strong wedge with very strong economics that we had built the avenues to generate demand, high quality demand, and I think we have gotten to that stage, and we’re now preparing the launch of our second product, which is going to be a product that, you know a bit about it, but it’s going to be a product with higher day to day engagement and invitation for these high quality consumers. Tell
11:41
us more, right? Let’s break it here. What does the roadmap look like? What could the next you know, few products be for digit Yeah.
11:49
I mean, I think for the next couple of years, we want to remain very focused on credit. On your episode with Finn Upham, he really emphasized the importance of offering fewer but better options, and we share that philosophy. So we don’t want to have we just we don’t want to offer any product. We just want to offer the best products for our consumers. And the way we think about that is that these need to be products that benefit our customers financially. So we don’t believe in offering access to buying crypto to every retail consumer out there. We don’t believe that every consumer should be able to buy single stocks, because not everyone is qualified to do that. So we only want to offer products that benefit our customers, personal finance situation, and starting with credit, we think that worse, or one of the worst, components of consumer credit, is this revolving component with minimum payments and stuff like that. So we’re getting rid of that. And so one of our next products is our revolving credit line that our customers will be able to use to refine more debt or finance major purchases, but always using or having access to low rates, fixed installments, predictable loans, so that they are always able to afford them. And then, of course, trying to build the next American Express for Latin America. Credit card is right up next on the on the roadmap, but in the same way, with a very different approach to how credit cards work. Love it there.
13:18
There is like a window here, there’s kind of a needle to be threaded, because on one hand, you might deal with, you know, something called planned exigence, which, like a lot of the dating apps deal with, right? So, like, if you’re successful in your mission, then your customers leave, right? And so the dating apps are actually motivated not to make you successful, but to make you feel successful, right? And then, on the other hand, if you, you know, if you overstep with fees and structures and everything else, you’re gonna get your customers in a deep, deep hole that they can’t get out of, and that’s problematic for everyone, right? Your loss ratios go up, and you’re not providing really a beneficial service to consumers at that point. So you kind of, you know, there are some guardrails here that you have to thread, you know, make sure that consumers are getting the right value without graduating off and without getting into trouble. Yeah. I
14:11
mean, that’s a great way to put it. But I mean, we have always prioritized financial health of our consumers. We’re very mission driven, in that sense, we think in the end, consumer finance is a bit about trust. So if we want to build a long term relationship with these consumers, it doesn’t make any sense to try to squeeze them and make as much profit as we can from the very first loan. So we always prioritize helping them pay off debt. And of course, what’s our job and what we need to be very good at, is offering those next products so that they want to stay with us. And we think they’re going to want to stay with us, because we have a 90 plus NPS score. You can see what our customers are saying in our reviews on Google and Facebook. They want to, they want us to offer more products for them, and that’s something that we need to move towards very, very fast from now. So
14:57
David, you closed a larger. Raise. I know it was an extensive process over many months, but $50 million right via debt facility, which, which you need? Right, like you’re building a tech company, but these consumers need access to credit. And so what I’m curious about is, like, walk us through how this is similar. How is it different than kind of the equity raise process?
15:20
Yeah, that’s a super interesting question. And I think many, many founders in FinTech are not very familiar with this until they get to this stage. And I think it’s very important to say that it’s fundamentally different. Equity investors, I think, on one hand, are looking for unlimited upside, right? They know they’re going to lose, and some of their investments are going to go to zero, and they’re okay with that, because that’s part of a VC model, right of the equity investment model. So their appetite for risk is much higher. But when you think of private credit investors or defenancy investors, then you see that their returns are capped. Their offset is capped by the interest rate they charge you, and probably another couple of fees, but they have a capped upside, so what they need to make sure is that they won’t lose money in any way they cannot afford to lose money. The opposite mentality, right? The opposite and then, like you’re used to, speaking to VC investors, and then initially, so you want to share the vision and the goals of the company and how large it will be, but they don’t really care about that, or at least not that much. They care more about the actual numbers of the company, the actual performance of a portfolio, the actual profile of a customer, the level of risks that they are accepting. So it’s a very different approach, and it has implications along with the process in general. So the diligence is very intense, way more intense than my experience with equity investments has been. The term sheets are much more complicated, and you need to make sure that you understand every single term, because every single term is very important. We usually like when I read my first term sheet in October last year, to be very honest, I only understood the interest rate and the advance rate, but it was like a nine page term sheet. So I spent a lot of time with other founders, with experience. I spent a lot of time with chat, GPT, understanding every single concept, and then I became fairly good at it. But then the most important part came comes after you sign the term sheet. So structuring and negotiating the deal, the loan agreement, setting up the structure, the SPVs, etc, that’s what’s important, and that’s what defines the success of the facility. So it’s a very different process, way more intense, very challenging, but it’s something that we need to when you’re in lending you really need to be able to navigate capital markets, and that’s an important part of a business. How
17:46
long did it take David, from when you kicked off to when you closed? So
17:50
it took us from October the 12th, when we started having the first conversations with debt financing firms, until january 18 to sign the term sheet. We received nine different term sheets, and so we had some leverage to negotiate better terms. And that was a great process. We signed the term sheets on january 18 this year, and then formally closed and did the first draw on June 18. Wow. So still, after five months, five months from term sheet to formal closing. And many people told me that was very fast. Like many people, take nine to 12 months from signing term sheet to closing. So we did a very good job with that closing and negotiating and structuring process, but it was very, very intense, I think, probably one of the most challenging stages of my career so far,
18:40
what lessons or suggestions would you share with founders that have a lending component to their business? Well,
18:45
I think, well, that would be an important one. Like, like, you need to be able to navigate capital markets and understand how a debt facility works and how you need to structure that. That’s important. But then I would mention another couple more that are, I think customer acquisition, go to market distribution is very hard for any consumer business or for any business in general. Brenna, when it comes to lending businesses, growth and customer acquisition, it’s something very unique to think, think about, because it’s the first step in terms of risk management, the way you acquire customers has a direct impact or a direct effect on your portfolio performance. So you need to make sure that you develop the right channels that have positive selection. You need to communicate your product the right way, in a way that attracts customers that are willing to pay, and not only customers that are desperate to get money. So that’s very, very important. And then the second lesson that I wish that I would share, that we I think we can learn it by accident, and we were very lucky, is that building the right data architecture from very early on, it’s essential in many, many ways. We were very lucky because we met an amazing data engineer. Here, along the way, we were, I think to some extent, we were not even sure about what a data engineer did, but we made, we met this great guy, and we wanted, we knew we wanted to work with him, so we offered them a job before even having our first data scientist, which was funny, and people say that that was weird, but, but that turned to be very, very good looking backwards, and I think that has had an amazing impact in the company in many ways. So we’ve been able to track the most important metrics in real time. From very early on, we have built built in dashboards for our investors. That was very important during the debt financing racing process. That investors really like, that we were able to generate loan tapes automatically in a very simple and fast way which many other FinTech companies struggle with. We are able to deploy new machine learning models much quickly than we would if we didn’t have built this data architecture. So putting a lot of attention into building the right data architecture. I think it’s essential to any lending business, and that’s something that I would highly recommend.
21:06
So you talked about customer acquisition right lot of nuance there. You got to target the right folks. You got adverse selection issues. And consumer businesses, classically, are challenging because there’s so much pressure on go to market and customer acquisition, right? It’s a little bit different than B to B, and you got to do it in a cost of effective way. And, you know, many methods that one employees at the pre seed or seed stage don’t scale as the business grows, right? So I want to hear, and I, you know, I, I’ve been teased about this, you know, I’ve kind of been close to the business. I know a little bit, but talk about some of the unique ways that you’ve approached go to market. Yeah.
21:46
I mean, there, I would say all credit goes to Dino, our chief growth officer, who has done an amazing job together with his with his team, and now we’re in a very interesting position. 80% plus for customer acquisition is organic, but through through channels that we actually control, and I’ll get more into this, but 80% of our customer acquisition is organic. We have one of the best CACs, I would say, on the market. And when you consider that, together with the fact that we offer higher loan amounts of have very lost rates, you can see where the economics land. So that has been an amazing job of Tinos team. And I would mention a couple of things. First of all, beyond specific customer acquisition channels that we have developed, the way in which they develop those channels, the approach that they take, it’s very disciplined, very data driven. Tino is an economist, so it’s not a marketer by a career. So he was initially an economist, and then he has been working in growth for startups for more than 10 years now, but that he’s very data driven. He measures everything, he optimizes everything, more in customer acquisition, but also funnel optimization, and he has set the example for everyone on his team to work that way, and that has allowed us to improve customer acquisition every month since he joined. Joined the company a little bit more than two years ago, and now going to a specific channels. The key insight that Tino and his team had was that there was basically no high quality content, personal finance content in Spanish, in any format, but especially video. Most of the content came from like these affiliate marketing companies that sell leads. So that’s not very objective. If you’re, if you’re, if you’re generating personal finance content, but you’re selling the leads, you’re gonna recommend a credit card, that it’s probably not the best for the consumer, or a personal one, that it’s not the best, or a checking account, that it’s not the best. So there was no high quality content in any format, and we decided to pursue that opportunity. We made a strong bet, especially with video, in a way that was very easy to adjust for consumers, very easy to understand, speaking in their own words, in their own language, and that has been a very successful strategy. We have only in the last year, generated more than 70 million organic views with our content. We sent a weekly bi weekly newsletter that now it’s being opened and read by 48,000 people every time we send it, and that’s one example of something that we’ve done that has been very successful. And also, going back to my previous point about the quality of the leads that you generate, the type of content we put out there has a lot of influence in the type of quality or in the quality of leads that we receive. So if we, I don’t know if we post a video, some one video that was very successful as a review of the American Express Platinum Card. So that brought very high quality customers right, very high approval rates, very high credit scores, very, very high loan amounts. And so we have identified a way into in like to develop a launch. Videos that, I would say, first of all, go viral. We have nailed that virality. And
25:06
how is it educational? Is it comedic? You know what? What’s the it’s
25:10
a mix. And I would say we have an amazing woman on our team, Moni. She, she’s she’s also got a lot of great for for the quality and viral videos. She’s very creative. She’s very young, so she understands how to like what people like to see in social media, on Tiktok and Instagram, and so I think there’s a lot of merit in what she has done so far, but it’s a mix I would think, of providing value so making sure that this is something, that it’s of value for people, and that is relevant for people on a day to day basis, but that it’s very easy to consume, very fun, very entertaining, very creative. So that’s, I think it’s a mix of those things. And I would say also that we always tell the truth. We’re always very objective. We recommend what needs to be recommended, what’s actually good for consumers. We told what’s good about some credit cards and what’s bad about the same credit cards, because we do not sell leads and we do not profit from any of that content that we create. So we are free in that sense. And I think customers also value that objectiveness and honesty that they do not receive elsewhere.
26:18
I love it. I love how you found a gap around, you know, an area of content and a medium put together. It reminds me of many years ago when I founded a podcast, when there was zero audio content on venture at the time. Now there’s plenty, but, but, yeah, it’s fun when you make those discoveries. So talk to us about how scarcity has become your superpower, right? You, I mean, you’ve had some lean fundraises, and you’ve built just a remarkable business with incredible progress and growth on a shoestring, you know, like, talk to us a bit about that. Yeah.
26:52
I mean, I think our story is full of, like, what I call, like, blessings in these guys. Like, we were very lucky in many ways that we didn’t think we were lucky back then when they were happening. And one of those was that, as first time founders, Manuel and I, with no previous relevant industry experience, we had never worked in banking or finance or credit before, no pedigree, no Stanford, MBA or whatsoever. So it was very hard for us to raise money. Initially, it took us four years to get from starting the company to actually raising our $4 million seed round. During those four years, we only raised, like, $1 million in precinct funding from angel investors, and most of which we used to fund the loan book. I mean, that was not for operations and growth and so we need to, we needed to be very creative. There was basically like, there was no excess capital, there was no money to spend. So it forced us to become very, very efficient, super efficient. So we always needed to automate before hiring. We needed to optimize every single step of a process, because there was no room for waste, right? There was no room for spending on having beers on the fridge and doing offsites at the beach and stuff like that. So, and what’s very important, I wouldn’t say that we were visionaries and decided to found a company that way. It was just the way it was, but it became part of a culture of a company, right? So everyone on our team now cares about efficiency, about profitability. No one cares anymore about having a kitchen full of snacks or doing these off sites at the beach. They care about the actual business, right? Like it should be very evident that a business should make money and should be profitable and should have solid fundamentals, right? And I think what was very interesting, and was a very it was a great moment for me to see, was that when the tides turn, like after the huge wave of venture capital in 2021 and early 2022 when everything changed, many companies that weren’t used to working in this very efficient way. Faced a lot of problems, like the most important one, I would say, was like radically downsizing, downsizing their teams and doing massive layoffs. And when our team saw that they have a very safe job, that we were not doing any layoffs because we didn’t do any layoffs, we didn’t need any layoffs because we only had the people that we actually needed, they started really thinking about or really seeing the value of working in this way so, and now they value the way they really value the way we think, the way we work, and that has been a very important part of our culture, that has become a very important, powerful of our culture.
29:38
Yeah, anything else on the culture element. I wanted to ask about culture, but you’ve, you’ve definitely talked a lot about it,
29:44
yeah. I mean, that’s always a challenge. And as first time founders, I think initially, like seeing all of what we thought was a very fun and entertaining and attractive tech culture in Silicon Valley, right? Like with the beautiful offices and flexibility? Limited vacations and like these kitchens full of snacks and beer stuff like that. We thought initially, like that was what mattered. But then very quickly, we realized that what really matters is building something that it’s very important, like solving a very important problem that you’re passionate about solving, bringing the right people and doing like the hard work and enjoying that process. And I think the best definition that I have heard for culture in a company comes from Danny Meyer in an episode with Tim Ferriss, the founder of Union Square Hospitality Group. And he said that the culture of an organization is the sum of all the wanted behaviors that you celebrate or praise, minus all the unwanted behaviors that you tolerate. And we discussed and I discussed, and we were like, wow, this is a great definition, and we have definitely been tolerating some behaviors that we shouldn’t be tolerate tolerating. And I would say, or I would add, that in the very early stages of a company, in my perspective, basically the core values of the founders, the way the founders think, the way the founders make decisions, the way the founders work, is what sets the culture. And we have taken that very seriously. We do not have our values on the wall and stuff like that. We just try to be coherent with the way we think and the way we act, and also demand very high standards from ourselves, initially and then from the rest of the team. And we’ve been very lucky to build a team that shares our values and the way that we do things and the way we think we think things should be, and our vision of the world. And I think now we feel very proud of a company that we’ve built so so far. So that’s how we how we think about culture, at least until today.
31:50
What was the biggest mistake that you made in building your team?
31:54
I mean, I’ve made many mistakes as a first time founder, so although this would be very, very big, but something that I’ve learned is that being a manager or a leader at a company is very counterintuitive. In many ways. You need to go up against, like, very basic human instincts. And I would say there are two big mistakes that I’ve made because of not going against those instincts. So the first one, and going back to referencing Danny majors episode with Tim Ferriss, he suggested something that, for me, was super interesting. I’ve never thought about it that way, and now that you think about it, it becomes obvious. But he suggested that leaders at companies should focus on watering the best flowers and letting the weeds take care of themselves. And what that means is that you should focus on nurturing and developing your best people, instead of putting all of your time, attention and effort into trying to motivate bad employees or change the behaviors of bad employees. And I think that is very counter intuitive, because if you think about it, in life, we usually take for granted everything that’s going good. If your relationship with your spouse is going great, then you probably like, you probably relax a little bit, right? And if your health is going good, you relax a little bit, and stuff like that. We usually take for granted everything that’s going good, and we obsess with the things that are not going that, that are not going that good, right? So that’s very counterintuitive, and I still struggle with that one, but I try to keep it in mind as much as possible. And the mistake that I’ve made is that I have not focused on watering the best flowers, and I have spent a lot of time trying to motivate the bad employees. And very related to that, a very common advice that many founders receive when we when they start a company, and you should, like you listen to this advice everywhere, is that you should fire bad employees very quickly. But then again, then again. I think that’s very difficult to do initially, because we are wired, I think as humans, being, human beings and social beings, to protect each other and care about each other to some extent, but and we made a few mistakes like that. It took us we should have let go of people much faster than we did, quite some quite a few times. And if we go back to thinking of culture as or a big component of culture as the unwanted behaviors that you tolerate, then What message are you sending to the rest of the company when you’re tolerating someone that is not performing for a long time, right? And so in the end, I’ve gone to realize that keeping a bad employee inside the company is bad both for the employee and for the company. I think for the employee, you should let the employee go and find a job somewhere in which they can be their best selves, and then you can, you have to send the right message to the rest of the company. So I think those are the two of the biggest mistakes that I make among many
34:52
hours, and we’ve all had experiences with bad employees, and sometimes it’s just bad fit, right? Like there’s a cultural mind. That you know, that we have at new stack, that you’ve got a digit and, you know, typically in the first three months, you can see if somebody’s kind of has an aligned mindset or is probably going to thrive in a different environment, you know, where maybe their strengths are featured and other weaknesses aren’t getting in the way. David, I’m curious to learn more about building in Guadalajara, right? Like we invest in outsiders, like we’re always trying to find exceptional, professional entrepreneurs that are off the beaten path, and you certainly are, sir, I had never been to Guadalajara before meeting you talk about the advantages and the disadvantages. Yeah.
35:41
I mean, like, first of all, I would say that, like, great companies can be built anywhere you in the US. Have a lot of great examples, right? Like Berkshire Hathaway is based out of Omaha, and I think Walmart is paying out based out of Arkansas, right? So you can build a great company anywhere in the world, I think, especially now with all the technology and all the means that we have. But I think I would say, I mean, you, you came to Guadalajara, we had a great time. It’s a beautiful city. It’s large enough. We have 8 million people. It’s connected, very connected. We have international flights and quick connections to anywhere in the in the world. Great services, great quality of life. It’s a beautiful city, but I would say it’s, it’s definitely an advantage because of it has a very large pool of talent, technical talent, especially we have some of the largest and best universities in Mexico. Many people from smaller cities in the center of Mexico, I know even the north of Mexico, conglomerates degree at a university here, and so there’s a lot of talent, but at the same time, it’s a little bit less crowded than Mexico City, so competition for talent is less, let’s say, first, fierce. And I will also mention that leaving I’m a deep believer of in person work, so I usually come to the office from Monday to Sunday. I really love our being at our office, but I’m a big believer in in person work, of in person work, and Guadalajara, given that it’s not crowded or cowardly gas Mexico City, for example, it allows people to be able to commute to work and then commute back to their homes and without significantly damaging the quality of life. So I think also that’s, that’s one of the advantages that we have in building
37:25
you have been great to work with, and one of the best you know, you and I have had some discourse about metrics and managing and measuring the right things. What would what input advice would you leave, you know, with other founders out there when it comes to managing and measuring your metrics? Yeah,
37:45
I think one of the most important things, I would say, is like, be very careful about lagging indicators. In our case, a great example of that was that when we started the company with very little knowledge and credit, we were very focused on the fault rate. So from the time that you originate a loan and until it’s classified as default, 90 days past due, in most cases, then 90 more 90 days need to go by, right? So you only know that a loan is defaulted after three months after he he or she stopped paying. So that’s a very lagging indicator. And so for a long, a long time when we were just starting the company and scaling the company, initially, we thought that we had a very low default rate, until it exploded several months after right? So otherwise, that was a like big lesson that we had. Luckily, we were very small back then, so we were able to survive that high default rate, but we learned that we needed to include like early indicators of performance of our portfolio, for example, in that case. So we started measuring first payment default. We started building cohort curves in real time. We started measuring entry roll rates and a lot of metrics that actually tell us how the performance of our portfolio in a more timely and actionable manner in which we’re able to react accordingly at the right time. So I would say, be very aware of lagging indicators. And I would say on the other side, it’s very important to focus on the inputs and not only the outputs, like, for example, loan book size or portfolio size. It’s a result of several different inputs that you can control more closely on a day to day basis. I think the founders of ramp, an amazing company in the USA, they talk a lot about this, like focusing on the inputs and not the outputs. The outputs will take over of care of themselves if you are very focused on the on making sure that the inputs are on the right track.
39:42
I can’t underscore this point enough. It’s so critical that many years ago, I was on my first board, and founder was presenting a bunch of metrics, arr and dollar retention, etc, and I just had this moment. I’m like, why? You know, I said. To everybody, you know, why are we so focused on all the lagging indicators of success? And there was an audible laugh from the board, like they were, like, shocked that I would say that revenue is a lagging indicator, but it is. There’s all these things on the front end. There’s all these behaviors, and often there’s way to measure if things are working and ultimately resulting in revenue. And, you know, all this emphasis you’ve put on leading indicators and inputs, and not just, you know, six months later, here’s, you know, here’s the output. Because if you’re doing all the things right on the front end, then the revenue and the success tends to follow. One more question here, David, so you, you mentioned Berkshire Hathaway, and that triggered something for me. So you’ve compared your business to Costco. Why? Yeah,
40:47
I mean, I think Costco is another great business model. And I think very similarly to American Express, they have designed a business that acquire or attracts customers with high purchasing power, and at the same time, they keep their cost structure very low, very efficient. And so the margins and the multiples that, like every efficiency metric of Costco is better than Walmart’s, right? Very different businesses, both great businesses, but customers are willing to pay much higher multiples for Costco than that for Walmart, right? Because it’s a more receiving business model. It’s a more efficient business model. And there’s something that I also really like about Costco is that they have made very conscious decisions about doing what’s right for the customer, and very being very honest towards the customer and treating customers and supplier with suppliers with respect, and that’s something that we also share. And those are some of the ideas that we think about Costco. We would also love to build the Costco of consumer finance. Definitely love it.
41:52
David, if we can feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about?
41:59
Yeah, I mean, I would love to hear more stories about successful Latin American founders, and I think the best one is Marcus Galperin, the founder of Mercado Libre. It’s like just an amazing company. He’s built the most valuable company in Latin America in just, I think, 30 years or so. And he’s not very often on podcast or, like, doing interviews and stuff like that. I think many people would benefit from listening to the stories and lessons of building medically into what it is today.
42:29
Well, when I tell him that you suggested him, I’m sure he will be thrilled. You know, David, what book, article or video would you recommend the listeners?
42:36
Yeah. I mean in terms of books, the ones on my back, I think are great recommendations here. One for Peter Thiel that really motivated us to start with a very specific wedge targeting a very specific market, and then span from there. So 01, is an amazing book. The hard thing about her things from Bren Horowitz, it’s, I think, a Bible for any founder out there. And the innovator’s dilemma from Jake gristenson is also an amazing book. I have mentioned Danny Mayer’s episode with Tim Ferriss several times in the in this episode, so I would definitely encourage people to go on and listen to it. I think it was a great episode on how to manage and the teams and on American Express. There’s a very interesting article wrote by written by Mark Rubinstein. He has a sub stack called net interest. And the name of the article was hate the expander. And it was an analysis on American Express business model that I found very interesting.
43:31
Do you have any habits, tactics or behaviors that are a force multiplier?
43:36
Yeah, I don’t know if I have a specific habit, but what I have convinced myself of, and I’m very convinced about, is that resilience, which is, I think, an essential skill, or for, for any founder necessary skill I will, yeah, it’s, it’s life of that you need, you need to be resilient so, but I think resilience is a muscle that you can Train, that you can develop, that you can build up. So I do a lot of these, like minor habits and minor decisions every day to try to build up my resilience. So like when I get to the office, I usually take the stairs instead of the elevator because it’s harder, and I prefer things that way, going a little further when I’m exercising and or even doing ice, but every, every now and then is something that I do and just to build up resilience, as I think, is very important for founders and general, life very
44:34
good. And then finally, here, what’s the best way for listeners to connect with you and follow along with digit?
44:39
Yeah, I mean digit, Mexico, in social media and in Instagram, Facebook, Tiktok, whichever. And for me personally, I’m off social media, so it’s not that easy, but I only have a Twitter account that I use mostly to consume content that I like, and not as much as to produce content. But I handle this. David garase, it’s. E, A, R, A, C, E, David Garcia. So there and then I would say, probably LinkedIn. David Garcia says on LinkedIn. So I would say those are the best ones
45:10
on if you’re in Latin America or Mexico and you need to refinance some debt, check out digit today. He is David Garcia. The firm in company is digit. David, it’s such a pleasure to be partnered with you and invested with digit, and thanks so much for joining us today and sharing a bit about the journey now.
45:30
Thank you for having me, Nick. I really enjoyed it, and it’s also been a pleasure to work with you, and I look forward for the next years.
45:37
Very good. Thank you, sir. You
45:44
Brenna kyper, up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today, until next time, remember to over prepare, choose carefully and invest confidently. Thanks so much for listening.
