Nov 11, 2022, 4:55 PM ETInterview, Fireside Chat

Martin Escobari: How to Invest During a Recession; Negotiation Tips; Developing Markets | 20VC #948

Martin Escobar was born in a Bolivian oil camp to communist doctors and grew up in a town of 10,000 people in the Bolivian jungle.
Against his parents' wishes, he attended an American school, which taught him English and enabled his subsequent move to the U.S.
Escobar attended Harvard College, becoming the first Bolivian to attend the university in 354 years.
He initially aimed for Yale but was convinced by the Governor of La Paz to attend Harvard instead, despite knowing Yale was ranked higher at the time.
He spent 20 years living in Brazil after falling in love with his Portuguese instructor and finding the country's culture and music appealing.

Escobar co-founded Submarino.com in the late 1990s, Brazil's first e-commerce company and the first Brazilian tech firm to go public.
GA declined to invest in Submarino initially, but two years later hired Escobar to run their Brazil office, which he later expanded to Latin America (now ~15% of GA's portfolio).
Five years ago, Escobar became Chair of GA's global investment committee in New York.
GA currently manages $80 billion across 15 global offices and has operated for 41 years.
Escobar cites the transition from Bolivia to Harvard as moving from a world of "limited possibilities" to "limitless opportunities," driving his desire to help other entrepreneurs access these opportunities.

Escobar identifies three statistically significant factors for a 10% of transactions generating 50% of gains: market size, business model defensibility, and team quality.
He asserts that market size is the single most critical variable, noting that "no matter how good a team and a model is, you will never outgrow your market."
He emphasizes that founders and managers are the "heroes" of the entrepreneurial journey, while investors primarily provide capital and support.
His investment thesis prioritizes companies with "beautiful business models" and those in "winning" markets, derived from his experience of the hardships of operating in stagnant markets.
He acknowledges that investors must simulate "alternative universes" to account for dynamic market creation, citing Uber's expansion from a premium service to a multi-product platform as an example he missed.
He warns against the bias that a specific sector is "bad" after a single loss, advocating for voicing biases explicitly to the investment committee to mitigate them.

Escobar identifies three warning signals of a market peak: everyone making money (including the least talented), the disregard for traditional valuation metrics (e.g., shifting from EBITDA to ARR), and a spike in deal velocity (deals closing in weeks).
In 2021, GA advised its portfolio to "get to fully funded plans," resulting in 97 of 200 portfolio companies having fully funded plans by the time of the conversation.
GA maintained discipline during the 2021 hype by refusing to run fund commitments faster than three years, unlike competitors deploying capital in 12–18 months.
He describes the current downturn as "fun" for investors because it allows for rational consolidation and redefining of industries rather than competing for deals at 20x earnings.
He contrasts GA's measured approach with "tourist capital" (e.g., SoftBank, Tiger Global) that drives "growth at any cost," which he argues destroys business models and leads to a "hangover" of companies with no viable path to profitability.
Escobar notes that only 3% of business models are "winner-take-all," meaning in most cases, disciplined followers outperform reckless leaders who exhaust their capital.

Escobar insists on paying a "fair price" defined as a valuation that allows for at least a 25% return in five years based on a P/E multiple exit.
He views negotiation as a "dance" to reach a partnership rather than a win-lose game, maintaining the willingness to walk away if the price is not fair.
GA invests in 50 out of 10,000 companies reviewed annually, using this selectivity as leverage to enforce fair pricing and partnership alignment.
He argues that while speed and price were critical in 2021, GA's willingness to wait for fair value has become an advantage as the market corrects.

Escobar resolves the paradox of checklist usage by combining data gathering (to cure bias) with "educated intuition" (to make the final judgment).
GA uses a four-person investment committee requiring three "yes" votes, where partners are paid based on global performance rather than individual deal success.
The firm practices "extreme transparency," allowing all employees to hear investment committee discussions and even view voting records in executive sessions.
To prevent hierarchy bias, Escobar requires the youngest team member to voice their opinion first in a deal discussion.
He advises young investors to form a conclusion before crunching data, then use data to support that conclusion, while predicting the questions of their committee members.
Escobar distinguishes between "macro themes" (trends like disintermediation) and "micro themes" (specific technologies), advocating for the former to avoid confirmation bias.

Escobar admits to losing confidence in 2013–2015 after attempting traditional private equity, concluding that technology-led disruption is his true strength.
He views his current purpose as investing in emerging market entrepreneurs who are "eating the world," rather than just solving local problems.
He argues that retaining a youthful mindset requires staying "playful and humble" to avoid becoming a "preacher of the truth" or a "moralist."
Escobar advises his daughters not to impose "false trauma" to drive them, noting that the universe will naturally provide their own "mountains" to climb.
He views himself as a "vessel" for capital energy allocated to meaningful causes rather than a vessel accumulating wealth for material goods.

Escobar cites E-Trade in the U.S. and XP in Brazil as successful thematic investments in financial disintermediation.
He identifies his biggest regret as declining to invest in Nubank due to a dogmatic belief that no emerging market credit institution could survive without deposits for 10+ years.
He missed Uber in a $2 million round, passing because the addressable market was then estimated at only $2 billion.
He recently invested in companies in Brazil and Mexico solving digital identity fraud, viewing Latin America's experience with fraud as a global "mousetrap."
He regrets a near-miss on an Argentina acquisition of $500 million, waking up just before bidding to avoid a country collapse.

Favorite Books: Man's Search for Meaning by Viktor Frankl, Good to Great by Jim Collins, and Paired Company Analysis by David J. Teece.
Best Investment Advice: "Rule number one: don't lose money; rule number two: remember rule number one" (Warren Buffett).
Most Common Mistake: Hubris and feeling invincible after a major success.
Definition of a Great Board: A small, diverse group where the CEO can open their heart and the board listens and offers insight (citing Bill Ford).
Recent Mindset Shift: Realized his emerging market instincts are not a handicap for the U.S. market but simply need recalibration.
Global Ambition: Believes the world of venture will naturally become more global as emerging market founders build $10 billion+ companies.