Bloomberg Línea — Kavak, a digital platform for buying and selling used cars that is Latin America’s most valuable startup, is prioritizing profitability and adjusting the execution of its strategy to tougher market conditions with a higher cost of capital.
“The decisions we’ve made are to have infinite runway [cash reserves without needing external capital] and not need capital anymore,” said Kavak cofounder Roger Laughlin in an interview with Bloomberg Línea during Web Summit Rio earlier this month.
Laughlin also said that the company’s ambition has not changed, but the speed with which it will achieve its goals may be slower.
“There are several ways to maximize the capital we have, reducing the cost structure, pursuing more profitability, capturing other lines of capital, leveraging assets, as we have done, and simply adapting our strategy for the current moment.”
He also said this is the right time to launch a company in Latin America.
“I doubt whether the current moment is worse for the entrepreneur. I think it is actually better. Because there are more entrepreneurs, more capital, more successful cases, more unsuccessful cases that are also good for learning what works and what doesn’t work.”
The Mexican-origin company announced its expansion into Turkey and the Middle East recently, but with leaner operations based on its experience in other markets.
Kavak operates in six markets in Latin America: Brazil, Colombia, Argentina, Chile, Peru and Mexico, having been present for the longest in the latter, and where it expects to reach profitability sooner.
According to Laughlin, the relationship with investors has not changed either, but talks are now more focused on how to help the company become profitable faster. Asked whether an exit for investors through an IPO would come only after reaching profitability, Laughlin said “not necessarily”.
“I see an IPO as a bit of a long way off because it needs to be a very stable company with very accurate projection capability. And we are still a growing company,” he said.
Kavak uses real-time market data to offer sellers an instant bid for their cars and also provides services such as home delivery and financing to buyers.
The startup was valued at $8.7 billion in a Series E round in September 2021.
According to Laughlin, the valuation was unchanged, given that the company did not raise another round or “reschedule” the price. Kavak has SoftBank and Olam Capital among its investors.
Audited since its second year of operation by E&Y, Kavak raised $810 million in debt funding from HSBC, Santander, and Goldman Sachs last September.
The following interview has been edited for length and clarity:
Bloomberg Línea: The market has changed with the rise in interest rates. What has changed for Kavak?
Roger Laughlin: What mainly changes is the focus and where we invest our time and resources and what are the priorities we focus on in the business. We emerged in a context of a lot of capital, of a very strong appetite from the market to grow, of a demand that was also very high, and now we are in a slightly different scenario, where we need to adjust accounts and chase more profitability. Being a little more cautious.
Kavak’s ambition and what we want to build has not changed. What does change is probably the speed with which we are going to get there.
BL: Has anything changed in the relationship with investors?
RL: I don’t know if it has changed the way they charge, I don’t think we have ever had a charging relationship. We have always had a great partnership with our investors, they have always been very involved in the strategy, but much more from a problem-solving standpoint. I think they really understand the challenge of building a business like Kavak’s in Latin America.
And I think not only Kavak’s, but the difficulty of building a business in emerging countries. They have always been very helpful. The conversation before was ‘how do I help you grow’, now it’s ‘how do I help you be profitable faster’.
BL: In this profitability proposition, have you achieved breakeven?
RL: Each country has a different purpose. For example, Mexico is a country that is more developed. We have been there longer, it is a different scale. So we will find profitability there faster than, for instance, in Brazil, which is still a market in which we have to grow. We have to reach a volume to be able to reach profitability.
There are other countries where we were born very lean and will reach profitability much faster, but also because of their size. I think it will be relative to each market.
BL: You have expanded to some Middle Eastern countries such as Saudi Arabia. How do you reconcile expansion at a time when you are seeking profitability?
RL: The expansions happen several months in advance. It is one thing when we announce the expansion and another when we arrive in a market and start to build the foundation.
When we started to arrive in the Middle East and Turkey, we were already starting to perceive a new moment in the market. We were already adjusting our strategy, which is much leaner and already brings a lot of the learnings from Brazil and Argentina. It is not that we arrived in these countries and now we have to invest more to grow, no, the investment that was made has already been made.
But all our plans in each country were adapted according to the current moment, but also according to the moment in that country, as well as the context behind it. This means that a country like Brazil, where we arrived with more investment, more infrastructure and more ambition to grow, we had to make different decisions compared to Turkey, Colombia, Peru and Chile.
BL: Kavak took $810 million in loans at the end of 2022. Why take on the debt and how was it possible?
RL: From the beginning we knew that our business would be capital intensive and that we would need to raise equity and debt capital. Our business has a particularity, like any dealership, only we do it with a different scale. We have an asset and an inventory to get that working capital with credit lines.
We built our track record knowing that this moment would come. The first decision we made was the first investment we made in Mexico, in an ERP system to control our inventory and our finances, and to be an auditable company. Kavak has been audited by one of the ‘Big Four’ since year two.
When we go to a bank, we come in as a startup with a different background, and from there we are able to get these lines of credit.
BL: What were the terms of those credit lines?
RL: The terms behind these lines of credit are totally relative to the company profile, the risk it poses to the bank, and the collateral behind it.
BL: Does Kavak consider an exit for investors through an IPO only after reaching a profit?
Not necessarily. The way we always judge the opportunity to do an IPO is the same way we analyze a round: does it make sense for the company? Is it what we need? Are we in a position where capital will bring what we need for the business? Does it make sense to bring in one more investor? Do we want a liquidity event for our employees and investors who are already in the company?
The current context makes us rethink all of this, but I see an IPO a bit far away because it needs to be a very stable company with a very accurate projection capacity. And we are still a growing company, we are discovering a lot of things, entering new markets and still building a lot of solutions.
But we don’t necessarily need to be profitable to do an IPO.
BL: Are you worried about Carvana’s situation in the US?
RL: As a benchmark, it’s not cool that a company comparable to Kavak is not doing well. At the same time, I think that if we were at an early stage, raising capital from global investors, and our biggest peer was doing very poorly, obviously that would hinder us.
But not in the situation we are in. We are not looking to raise capital and we are very relaxed about our cash situation. Our investors know the depth of our business and the differences with Carvana.
The value we bring to our emerging markets is much deeper. We are the largest originator of auto loans in Mexico. We do this with our own finance company. We would not need to do this in the United States because there is access to credit for everybody there.
BL: What are the main goals for this year?
RL: Consolidation of the markets we are in and to take decisions to accelerate and execute the plan we designed to meet this profitability in each of the markets.
BL: How do you evaluate the current scenario for entrepreneurs in Latin America?
IRL: started in 2016 in Mexico in a very challenging context because there were no comparable or successful startups for us to mirror.
So we looked a lot to the United States and Europe, and it’s a very unfair comparison. Funds don’t look at Latin America in the same way that they look at those countries and regions.
I question whether the current moment is worse for the entrepreneur. I think it is actually better. Because there are more entrepreneurs, more capital, more successful cases, more unsuccessful cases that are also good for learning what works and what doesn’t work.
What the funds are going to ask for now, and what is going to be looked at, is a healthy business, with a very clear idea of how it is going to be profitable, with a very clear product-market fit, and with a very clear strategy. And they are going to ask to take the necessary steps to expand as needed, with valuations that make sense, without putting pressure to throw capital at where it is not needed.
I think that, as hard as it is to see, to me the current ecosystem is the best time for Latin America. And I think that the region’s entrepreneurs have more resilience because the Latin American is in an adverse situation from birth, they are more complex countries. I think we are more prepared to surf this wave that is coming now.
