THE HARD TRUTHS ABOUT BUILDING AND SCALING A STARTUP | DAVID VELEZ NUBANK

Good one. That's a good question. We say "O" Nubank. "O" Nubank. "O" Nubank.

Well, I've always been an entrepreneur. I come from a—I'm Colombian, I come from an entrepreneurial family in Colombia, I grew up, I had my own little cattle business when I was 12. So, I always grew up thinking about entrepreneurship, about starting a company, and I went to college, studied engineering, but the big idea didn't come, I didn't know what to start. So, I went into the financial market, I arrived in Brazil in 2008 with an American investment fund, and one afternoon on Faria Lima, in São Paulo, there was this interesting moment. I had to open a bank account and the experience was truly exceptional because I'm here thanks to that frustrating experience of opening a bank account. I entered the branch, had to leave my laptop, my phone, my keys, in a locker, that revolving door with two armed guards watching you. I left there thinking, feeling really like a criminal, feeling like, you know, going through those airports in the United States; being Colombian, I've already gone through those random searches, right? And it was very—so I was very sensitive to that experience. And then I started thinking, started questioning, how is it possible that Brazil charges, has some of the highest interest rates in the world, only Malawi and Zimbabwe have higher interest rates than Brazil. The banks have some of the highest fees in the world and Brazilians have been receiving this type of experience, this type of experience of entering a bank branch and being treated like a criminal.

I started thinking about that idea, isn't there an opportunity there? Well, there are only five banks dominating the market; it's a huge oligopoly. Why aren't there more alternatives in the financial sector? Why aren't more people starting businesses in this sector? I started asking around, I started talking to people, former bank presidents, people who understood the sector well. And the general idea, the answer, was this conventional belief that you couldn't be an entrepreneur in financial services in Brazil; that the banking sector was a sacred sector, a sector reserved for certain banks, for certain companies, for certain families, closed to entrepreneurs, which had very difficult regulations, where a regulator wouldn't allow competition. People would say: "The big banks will kill you, the regulators will kill you." Forget it, whether you are Brazilian or a foreigner, you can't start a business in this sector in Brazil. But I thought there was an opportunity, especially with what was happening in 2012, which was the penetration of the internet and smartphones. Brazil was already one of the largest markets for Facebook, WhatsApp, and Twitter in the world. And clearly, in a world of branches, building a bank from scratch is impossible. You need billions of reais to build branches. But in the world after 2012, where the entire population has a smartphone, this is a much, much easier channel to reach a population that today would pay to not have to go to a branch. And so we moved forward, I met my co-founders, Cristina, and we started with this credit card product. We launched it while always thinking about the customer experience, thinking about an experience where we put the customer first, and then we designed the business model behind it. Quite the opposite of what traditional banks do; they first think about how to increase revenue by 10%, and the customer is left on the sidelines. And we launched it, and the demand has actually been, frankly, more positive than we imagined. So that is the moment we are in today.

Well, that is a very good question. The good thing is that banks see us as an app, right? So, their challenge is to improve their app, and then we're on the same level, and that's the end of Nubank. It's a similar view, right? Thinking that Uber is just an app is like thinking Amazon is just a website with an app, or Netflix is just a site. It's the same, it's basically the same relationship. What they ignore is that a technology company is much more than that. The app is perhaps just the tip of the iceberg. And underneath it, there is not only a technology infrastructure that we had the opportunity to design from scratch, right? We don't have the legacy of the past, no 80s mainframes, no habits that come from 20 years of acquisitions, but we also managed to create a culture from scratch, a tech company culture that is radically opposite to banks. We say that Nubank, by symmetry, is if you reverse it, it's a "knab." Culturally speaking, we are the opposite of a bank. And that's because our culture is very flat, with little hierarchy, very heterodox; we have people of 25 nationalities, it's a culture that moves fast, takes risks, and is very young, which is the opposite of a bank. So, in the end, that is our best defense and our competitive advantage. And in 3 or 4 years, banks will realize that it's much more than an app, that they need a cultural change, and changing the culture of a company with 140,000 employees is absolutely impossible. So today, we remain very focused on growing; we have very ambitious plans, and we are just at the beginning. We really like that Amazon phrase, which is "day one." They have been in the market for 20 years and it's still "day one" for them. For us, it's "day 0.1." We are really just at the beginning.

That's right. Uh-huh.

Right? Well, it was a—it was a very interesting start, because we found and rented a house there in—in Brooklin, in São Paulo, and that was the bank. And there were many engineers, many people we tried to hire at the beginning, who would go there and say: "Guys, what is this?" A house. We had our CTO living there, sleeping on the second floor. We had an engineer from Rio who was also living there on the second floor. After 8 months, we had 30 people working in the house. I was making conference calls in the kitchen. There was a very large bathroom that I started to think of how to, I don't know, use as a meeting room. But, yeah, it was really a—it was a very humble start, a very motivated team that understood the problem. What's cool about financial services is that everyone is a consumer, everyone has a problem, everyone has some story about a bank, credit card, or loan. My grandfather had to pay, you know, an absurd fee, I had to call. So it is a product, a sector where everyone can relate to the problem and that is very motivating to go and solve. So, we brought in a very strong initial team. We always said that culture, speaking of culture, it's interesting to ask you guys too how you thought about this, that the culture of a startup, of a company, is created in the first 3 months of life by the first 12 employees. If after those 3 months you reach 30, 40, 50, and you don't have a defined culture or worse, you have a culture that isn't the one you want, it's over. It's very very difficult to change that, it's quite traumatic. So, we were very, we thought a lot about the type of culture we wanted to create and, on top of that, on top of that foundation, we are building the company today and, anyway, the growth has been greater than what we imagined and we are running, hiring people, trying to keep the—the—the bar high, trying to keep the—the—the—the right culture. It's not always easy to do that when you have to hire 50 people a month, but we are certainly trying.

All right. I think it certainly helped that I had been on the other side of the table, that I had been an investor and had looked at many startups. I already knew what investors wanted to hear, and I knew a bit about how to tell the story and the type of problems these large investors really want to invest in. A point that is sometimes not well understood is that these types of investors want to invest in difficult things, not easy ones. So, one thing I heard a lot in the beginning is, "Oh, look, building a bank in Brazil is very difficult." And they said it as if it being difficult was a bad thing. The fact that it's difficult is actually good, because it means that if you can do something hard, fewer people will compete with you, and there will be higher barriers to entry. So, perhaps for a less ambitious idea, it would have been harder to find capital, but the fact that it was a big market in Brazil, with very strong competitors growing fast, and major difficulties, the prize was bigger. And so, the funding part, raising capital, hasn't—I don't consider that to have been our biggest challenge. I think the biggest challenge is perhaps how we build our business and, of course, thinking about other products we'd like to launch within existing regulations. We never had the idea that we would be able to enter the market and change the regulations so a fintech could get in. We had to understand the regulation and see how our business model fit within existing rules. And that has been the hardest part, especially for a startup, trying to understand how the Central Bank works and how the Brazilian financial system functions. Navigating that has been difficult.

I think there is a lot of opportunity, right? I always remember what we used to say back when I worked at Sequoia: look for large markets. You look at the 10 largest Brazilian companies on the Bovespa, five of the 10 largest are banks, and again, they own 90% of the financial market. So there is a lot of opportunity for fintechs to focus on different niches, different segments; capturing 1% of this market is already a large company. I see an ecosystem growing quite fast and with some very, very strong fintechs. So, I think it is a very attractive market, with a lot of room to grow. And there will be a bit of everything. I think there will be fintechs that banks will buy quickly. And in our case, that is not the idea. Our case is to grow and be here in 10, 20 years, completely independent. This was a decision we made early on, that we wanted to build a company for the very long term, not "I'll do this for two years and sell it to a big bank," but all of this helps to innovate in the sector. The banks themselves are competing, they are improving their products, and in the end, all 220 million Brazilians gain from this, they gain from greater competition, from lower interest rates, from better fees; everyone benefits from it. So I think it is a segment that will have a lot of growth and society will benefit greatly.

We don't disclose the exact number of users. I can tell you that over 8 million people have already requested a card and we still have 500,000 on the waiting list. So we are in the several millions, but we cannot disclose the number for now; does anyone here have a Nubank card? No. Raise your hands.

Just look at that.

Cool. Very good.

Interesting, isn't it? How it really is very cool like this because—

Cool. And to—and thanks to everyone for, you know, for being customers. For those who aren't customers yet, we'll get there. But I remember well in the beginning we would say: "A credit card is a boring product, right? Nobody wakes up in the morning saying: 'I want a credit card today.' It's not a cell phone, it's not a car, it's not a smartphone, it's not a product people get on a waiting list for. And that's why banks spend billions of reais on marketing, on telemarketing, on TV, on radio, on all types of acquisition channels to push this product to customers. Our—our bet was the opposite, it was almost the reverse. We said: 'Well, we don't have money for marketing, but let's create a product so good, with no fees, and provide such good customer service that we hope they invite other customers, that they do this—this—this word-of-mouth marketing.' And in fact, that's what happened. So even today, our marketing budget is very low, basically zero. It's just small tests, and customers continue inviting other customers at an accelerating rate. Even people who have been Nubank customers for over 2 years, they keep inviting people at a rate that is only accelerating. So, the focus is really on being—on providing a good product, on creating a product that is truly solving issues and helps with the customer acquisition part.

Uh-huh.