Kueski’s $35 Million Investment from Silicon Valley Shows Startup Potential in Mexico

Capital from U.S. investors has been critical to Kueski, and company co-founder Adalberto Flores hopes his success leads to more startups in Guadalajara attracting the attention of Silicon Valley.

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Startups begin with an innovator and an idea — and more in Mexico are starting to find capital for their dreams.

Kueski just got a big chunk of change. Late last month, the Guadalajara-based online lending startup closed on a $35 million round of funding. That number could jump to $100 million, and according to Kueski, this is the biggest capital infusion any Mexican fintech startup has ever received. At least $10 million of the equity came from U.S. investors, including the likes of Richmond Global Ventures, Rise Capital, and CrunchFund.

While tech entrepreneurship is on the rise in Mexico, securing this type of investment remains rare. Kueski co-founder and CEO Adalberto Flores recently told Nearshore Americas that this is partly due to the difficulty of securing capital in the country, something that is particularly hard when dealing with the risk-averse investment community in Guadalajara. They remain leery about tech startups.

“Old-fashioned business people in Guadalajara are very conservative,” said Flores. He says there is a new breed of young, aggressive people who have traveled the world and now want to launch startups in Mexico. But the cultural gap between them and the locals with money to invest means it is hard to get a new venture funded.

This is why he has had to look to Silicon Valley for investment. “When looking for capital, at least for Kueski, of the equity investment, probably less than 5% of it comes from Guadalajara,” said Flores. He says another 20% may come from Mexico City, but the rest is from the United States, mainly California.

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Capital from U.S. investors has been critical to Kueski, and company co-founder Adalberto Flores hopes his success leads to more startups in Guadalajara attracting the attention of Silicon Valley.

This is why Kueski’s big funding may mean good news for the whole sector in Mexico. While Silicon Valley is starting to realize the potential of Guadalajara, it is still early days. But $35 million is going to make headlines, and the more people who realize the tech talent and domestic market potential in a nation of 120 million people, the more stories we’re likely to hear about venture capitalists dumping money into Mexico.

There are signs of more to come. René Lomelí recently told Mexico IT that “everyone is talking about fin tech.” He is operations director in Mexico City at 500 Startups, a global accelerator in Silicon Valley that offers early-stage funding to promising young companies of anywhere from $50,000 to $1 million, and has watched the Mexican startup scene develop from nascent to active in recent years.

“There are a lot of things that are happening here,” Lomelí told Mexico IT. “There are a lot of different players — entrepreneurs, VCs, angels investors. There is a ton of activity going on in Mexico City, and I believe that this year we are going to hear about companies doing great stuff.”

Kueski is undoubtedly doing great stuff now. But its has taken awhile to get to this level. When Flores first had the idea for the firm, he was working for Ooyala, a video-based startup in Silicon Valley founded by current Wizeline chief Bismarck Lepe. Flores helped that company establish itself in his hometown of Guadalajara — Ooyala’s first Mexican office was in Flores’ kitchen — and the entrance of this Silicon Valley player was a symbolic step forward for the city as an innovation hub.

It was a big period of discovery for Flores, too. The more he talked with local companies, the more he realized that many innovative ideas were hitting a brick wall. Not enough Mexicans had bank accounts and there was a lack of channels to make online payments. So any business model that relied on online payments was thus unstable — to say the least.

One firm he knew of, for example, wanted to make a Mexican copycat of Netflix back before it spread globally. The tech part wasn’t that difficult, but the company wasn’t sure it would be able to get enough users who could make online payments. Some 85% of people in the country do not have a credit card, and back then many Mexicans would go to the convenience store Oxxo to buy a pre-paid debit card in order to make online transactions. Flores estimates that the nation was losing $5 billion per year in e-commerce due the lack of payment options.

There was potential here and he decided it was time to branch out on his own. After receiving some emotional and financial support from his friend and mentor Lepe, Kueski was born in 2012. The focus shifted from online payments towards micro-loans, but the overall concept was rooted in a realization that there was a lack of credit in the country. Mexicans could benefit from better online financial services.

The final business model isn’t without challenges. Traditional banks have reams of actuarial analysis to rely on when assessing credit risk. Fintech startups do not. But by giving out short-term loans of anywhere from $80 to $350, Kueski was able to quickly build an underwriting model. As it has developed, the company has become better at assessing default rates and what qualifications applicants must have.

The initial stage was treacherous — what if nobody pays back the loans? — but risking some of the initial investment is what laid the foundation for everything. “If it’s a short-term loan, we can build an underwriting model very, very fast,” said Flores. “In 60 days, you know who paid you back and who didn’t, and you can use that [information] to expand to other products in the future.”

Early investment came from a $1.3 million seed round from two San Francisco companies, Core Ventures Group and CrunchFund. One decision maker at Core Ventures, in particular, offered overwhelming support and mentorship, without which Kueski never would have gotten to where it is now. “He and CrunchFund are definitely the investors that made the difference between us continuing to grow as we have been growing right now or not continuing to grow,” said Flores.

Flores is reticent to disclose the specifics of the growth. But he says that Kueski has granted “thousands” of loans with an average value of $150. And this is just the beginning. He wants Kueski to grant loans throughout the region — and eventually in emerging markets across the world.

He realizes there are many hurdles to making that happen. The logistical quagmire of trying to send money into accounts maintained by the many banks in Latin America alone can be a bureaucratic nightmare. So while Flores is keeping his plans ambitious, step one remains focusing on growth in Mexico and talent recruitment before trying to take over the world.

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In evolving from startup to emerging fintech powerhouse, Flores and Kueski co-founder Leonardo de La Cerda have become a major success story for tech innovation in Mexico. The investors in Guadalajara are not going to change their tune overnight, but a company getting $35 million from Silicon Valley will open eyes.

Perhaps even more important is the effect such news can have on locals who are considering a jump into the world of entrepreneurship. Leonardo has been seeing more and more talented people who spent time at big firms abroad returning to work in the tech sectors of Guadalajara, Mexico City, and Monterrey. And it likely won’t be long before some of these innovators turn their great idea into the next Kueski.

“The best and most intelligent people in the country are not leaving to go and work for an international firm in another country,” said Leonardo de la Cerda in a Nearshore Americas documentary. “They are staying here and working for their people.”

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