Summer for me is the smell of grass freshly cut. The sound of children at play. The afternoon sun splashing through the trees.
Investors need a place to contemplate the issues of the day, a safe place to think about things that matter. My place is the front veranda in summer. A gin and tonic at my side, my dog Whiskey at my feet, a pad of paper on my lap.
As investors, thinking deeply about things that matter starts with picking out something that matters. One place to start is with the unexpected.
Peter Drucker once said the best place to look for future growth is with the unexpected customer. The unexpected customer could represent a hidden new application for an old product or a hidden new product for an old application. There is a reason a customer that wasn’t supposed to be a customer is in fact a customer. Digging into why can reveal some valuable knowledge about who finds your product valuable and why.
Investigating the unexpected nearly always leads to a piece of useful knowledge with a very long shelf-life. That is, the unexpected development is nearly always just the tip of the iceberg. The good stuff lies beneath the water, accessible only to those curious enough to peer through the murk.
Alexander Fleming didn’t expect to find mold killing bacteria in his petri dishes as he returned from vacation, but he did. Percy Spencer didn’t expect the chocolate bar in his pocket to melt as he walked through a radar test facility one day in 1945, but it did. Fleming and Spencer were curious enough about those unexpected developments to do some digging. Along the way, Fleming discovered Penicillin and Spencer discovered microwave cooking.
Imagine our surprise, then, when we learned Microsoft, with revenues of $200 billion and a market capitalization of $2.6 trillion, hired a tiny Uruguayan company to help manage its cross-border payment systems in emerging markets. How unusual is that? Microsoft is 400 times bigger than dLocal. What in the world could dLocal do for Microsoft that Microsoft couldn’t do for itself?
What’s more, Microsoft isn’t the only company with massive global scale relying on dLocal to manage emerging market cross-border payments. Meta, Salesforce, Spotify, Netflix, and Uber among others all count dLocal as an important service provider. All pay dLocal to assist them in managing cross-border e-commerce.
What is visible at the surface is unbelievably rare and totally unexpected. Like other unexpected developments, the kernel of knowledge that lies below the surface is the real gem here. It will pay dividends for years to come.
dLocal, it turns out, is laser-focused on figuring out all the red tape associated with cross-border commerce in certain emerging markets of their choice. dLocal solves all the cross-border e-commerce issues in those countries and then sells that expertise to multiple clients wanting to sell products and services into that country from abroad. dLocal figures everything out once and sells it to multiple customers, which is far more efficient than each of those customers figuring everything out for themself. By focusing on a narrow niche of the value chain and concentrating on a select few complicated countries, dLocal achieves a level of scale within their niche that companies hundreds of times their size cannot achieve.
We call it local scale. Local scale allows dLocal to provide a better, higher quality product to much larger companies at a fraction of the cost those companies can achieve on their own. Netflix has admitted that dLocal’s service is far better than it could achieve on its own, even though dLocal is a tiny company a fraction its size. Local scale in that sense can be a powerful competitive advantage.
In certain situations, local scale trumps global scale. That is the kernel of truth that lies below the surface; that is the piece of knowledge that will pay dividends for KP7 long after dLocal leaves our portfolio.
Meanwhile, the sun is setting on my summer paradise. The children are in for the evening. Whiskey rustles at my feet. I am happy with the evening’s work. Local scale. I like it. I smell dinner. I step inside.
