Sequoia Capital is one of the most successful venture capital firms in history. It was an early backer of a long list of iconic companies, including Instacart, DoorDash, Apple, Airbnb, 23andme, Block, Snowflake, Zoom, Stripe, Okta, WhatsApp, and Instagram (the latter two both part of Meta Platforms). Therefore, if you're looking for the next big thing, pay attention to what Sequoia is investing in.
In 2011, David Velez became a partner at Sequoia. His mission was to uncover hidden gems in Latin America. What he discovered quickly earned the attention of the Sequoia team, and soon, the attention of several billionaire investors.
From $0 to $50 billion
What Velez learned about the Latin American market was that its banking industry was dominated by a handful of powerful banks. Despite their market dominance, these banks weren't delivering on customer needs.
"David pointed out there was a bank on every corner -- and each of them had a line out the door," explains Doug Leone, another partner at Sequoia, in an article on the company's website. "Rather than competing fiercely for customers, this handful of financial institutions controlled 90% of Brazil's market, and the consumer experience was largely being ignored. They were among the most valuable companies in the country, yet simply getting a credit card from one of them often took months."
In response, Velez started his own company: Nu Holdings(NYSE: NU). Sequoia led its seed round, and the company eventually raised $2 billion through multiple funding rounds.
In 2021, Nu did an initial public offering (IPO). In less than a decade, the business went from an idea in Velez's head to a publicly traded company with a valuation of roughly $50 billion.
Billionaires are betting on Nu stock
Now that Nu is publicly traded, anyone can invest in its potential. So far, several billionaires have done so. In 2021, Warren Buffett's Berkshire Hathaway invested $750 million in the company. It hasn't sold a single share. Tiger Capital, headed by billionaire investor Chase Coleman, was also an early investor in Nu, and retains a $240 million stake.
Unsurprisingly, one of the biggest billionaire investors backing Nu right now is founder David Velez. After the company's IPO, Velez's net worth skyrocketed to more than $10 billion. He sold 3% of his shares last summer, but remains one of Nu's biggest individual investors.
What is it about Nu that makes these billionaire investors so bullish? Nu clearly has the vision and execution history to create tens of billions of dollars in value from scratch. During the next few years, it's set to repeat this recipe for success again and again.
This is Nu's recipe for success
In 2014, Nu entered the Brazilian market with zero existing customers. Today, more than half of the country's adult population is a Nu customer.
What was Nu's secret? In a way, its biggest advantage was that it started from scratch. Other banks had hundreds of physical locations and thousands of employees. That is, they had business models with high operating costs.
Nu, meanwhile, began as a digital-first business. Its services were delivered over a smartphone, not in person. Its operating model, therefore, was much more efficient than the competition.
This allowed its services to be more affordable and more accessible. If it wanted to roll out a new product, it could send a push notification to its entire user base, and they could sign up and begin using the service within minutes. Nu's competitive advantage when it came to cost and reach proved overwhelming for incumbents.
In recent years, Nu has shown that its success in Brazil wasn't a fluke. In 2019, the company entered Mexico, followed by Colombia roughly a year later. Since then, Nu's customer base has grown from 23.5 million users to 95 million users. The company has also turned profitable, generating a $360 million profit last quarter.
There are signs that Nu has already tapped its most lucrative opportunities. In 2017, for example, customers who had been with Nu for 50 months were spending on average $250 per month with Nu's credit and debit cards. In 2021, customers that had been with Nu for 50 months were spending just $150 per month on average. This suggests that as Nu expands, the quality of its customer base is getting diluted.
The good news is that Nu has plenty of room to expand both its higher-spend and lower-spend customer base. During the coming years, expect the company to enter new markets like Guatemala, Peru, Argentina, Ecuador, and Chile, potentially adding more than 100 million customers.
Additionally, Nu has a long runway to expand its services to existing customers. In 2017, the average Nu customer began with just a single product, typically a credit or debit card. Today, the average Nu customer begins with at least three products. A credit or debit card is usually still adopted early, but so are other Nu products like insurance, personal loans, savings accounts, and crypto trading.
Nu has several major pillars of growth to tap in the years to come. Now trading at a slight premium to the 2021 IPO price, Nu shares are a great long-term hold for patient growth investors.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb, Apple, Berkshire Hathaway, Block, DoorDash, Meta Platforms, Okta, Snowflake, and Zoom Video Communications. The Motley Fool recommends Nu. The Motley Fool has a disclosure policy.
