The Venture Capital Market in Brazil
Brazil
Brazil has been generating a significant amount of buzz in the venture capital market and startup community recently fueled in part by media coverage of several high profile firms establishing themselves in the country with dedicated funds or investments. The Olympics have further elevated the country’s profile and therefore brought global attention to their economy and business landscape. Venture capitalists and entrepreneurs like Efraim Landa are keenly aware of the untapped potential the Olympics may bring.
Brazil has a rapidly growing consumption-oriented middle class that now represents over half of the population. Approximately 88 million users are currently online, and by 2016 broadband and 3G penetration are projected to increase by 32% and 103% respectively. Brazil’s internet users are also highly engaged: despite having only 46% of it’s’ population online, Brazil ranks number two worldwide in numbers of users of both Facebook and Twitter. While economic growth in Brazil has recently slowed, many of the venture capitalists will continue to drive the market growth necessary for startups to successfully scale.
Brazil’s VC Landscape
While a handful of funds have been making technology investments since the 1990s, the emergence of a Brazilian VC ecosystem began in earnest only in the past several years with a significant increased activity in the last 18 to 24 months. According to reference materials printed in Brazil, at least 50 firms made approximately 80 investments in startups in 2012, which marks a sharp increase over previous years. Additionally, at least two Brazil-focused funds were formed representing $250M of assets under management. While participants include both global-scale VCs, opportunistically making investments out of global funds, as well as a handful of U.S. and European VCs who have committed resources and/or dedicated funds on the ground. Recent trends reveal the formation of a small but growing group of Brazilian VCs and super angels.
Many of the high profile venture-backed startups in Brazil over the past few years have been consumer-oriented capitalizing on proven business models customized for the Brazilian context, particularly e-commerce and marketplaces. However, as competitive intensity has increased many of these fast-follow sectors have become increasingly crowded and unattractive, with margins eroding and returns diminishing for investors. What aspiring and aggressive entrepreneurs and venture capitalists should focus on is Brazilian weak links/points that have not been addressed but inherently exist. The chance to get funding in Brazil has got extremely competitive. This makes it more likely that established players will maintain control in the new and opportunistic areas.VC exits will favor those with established presence.
Exit Strategies
The main question on the minds of many VCs investing in Brazil is the exit path. There is limited precedent of successful exits in the country. This means current investors are placing their exit bets on strategic Mergers and Acquisitions (M&A), primarily driven by multi-national trade sales. Most believe in a coming wave of acquisition activity. A string of successful exits would serve as liquid fuel for the ecosystem – bolstering the gradual cultural embrace of entrepreneurship by top Brazilian talent, demonstrating returns and liquidity, and prompting more capital to enter the ecosystem. On the other hand, a lack thereof would call the valuations of the current generation of portfolio companies into question, and the ecosystem would likely stagnate as capital stayed on the sidelines.
The Tech Market in Brazil
Do not pack your bags and jump on a plane to Brazil to hang a shingle with your name on it without careful analysis. Aspiring dreams and ideas are great and widely needed……but reality sometimes throws a curve at you. Startups and VCs in Brazil face restrictive labor market rigidity, regulatory complexity, high taxes, and pervasive bureaucracy combined with a potential “talent gap” due to a historical cultural aversion to entrepreneurship amongst the educated. If these business obstacles, including access to deep domestic capital markets, are not addressed, the likelihood of Brazil joining the ranks of global VC hotspots is low.
Brazil’s Future
Most investors believe Brazil is in a state of fragile growth where a select group of strong businesses will emerge from the current ecosystem, capitalize on technology and trends that will lead and achieve exits via strategic mergers and acquisitions or possibly IPO’s. This will lead to shallow capital markets holding Brazil back from achieving the VC industry growth profiles of China and India, and may ultimately cause investors to follow a more conservative approach towards committing capital to Brazil.
Brazil has a rapidly growing consumption-oriented middle class that now represents over half of the population. Approximately 88 million users are currently online, and by 2016 broadband and 3G penetration are projected to increase by 32% and 103% respectively. Brazil’s internet users are also highly engaged: despite having only 46% of it’s’ population online, Brazil ranks number two worldwide in numbers of users of both Facebook and Twitter. While economic growth in Brazil has recently slowed, many of the venture capitalists will continue to drive the market growth necessary for startups to successfully scale.
Brazil’s VC Landscape
While a handful of funds have been making technology investments since the 1990s, the emergence of a Brazilian VC ecosystem began in earnest only in the past several years with a significant increased activity in the last 18 to 24 months. According to reference materials printed in Brazil, at least 50 firms made approximately 80 investments in startups in 2012, which marks a sharp increase over previous years. Additionally, at least two Brazil-focused funds were formed representing $250M of assets under management. While participants include both global-scale VCs, opportunistically making investments out of global funds, as well as a handful of U.S. and European VCs who have committed resources and/or dedicated funds on the ground. Recent trends reveal the formation of a small but growing group of Brazilian VCs and super angels.
Many of the high profile venture-backed startups in Brazil over the past few years have been consumer-oriented capitalizing on proven business models customized for the Brazilian context, particularly e-commerce and marketplaces. However, as competitive intensity has increased many of these fast-follow sectors have become increasingly crowded and unattractive, with margins eroding and returns diminishing for investors. What aspiring and aggressive entrepreneurs and venture capitalists should focus on is Brazilian weak links/points that have not been addressed but inherently exist. The chance to get funding in Brazil has got extremely competitive. This makes it more likely that established players will maintain control in the new and opportunistic areas.VC exits will favor those with established presence.
Exit Strategies
The main question on the minds of many VCs investing in Brazil is the exit path. There is limited precedent of successful exits in the country. This means current investors are placing their exit bets on strategic Mergers and Acquisitions (M&A), primarily driven by multi-national trade sales. Most believe in a coming wave of acquisition activity. A string of successful exits would serve as liquid fuel for the ecosystem – bolstering the gradual cultural embrace of entrepreneurship by top Brazilian talent, demonstrating returns and liquidity, and prompting more capital to enter the ecosystem. On the other hand, a lack thereof would call the valuations of the current generation of portfolio companies into question, and the ecosystem would likely stagnate as capital stayed on the sidelines.
The Tech Market in Brazil
Do not pack your bags and jump on a plane to Brazil to hang a shingle with your name on it without careful analysis. Aspiring dreams and ideas are great and widely needed……but reality sometimes throws a curve at you. Startups and VCs in Brazil face restrictive labor market rigidity, regulatory complexity, high taxes, and pervasive bureaucracy combined with a potential “talent gap” due to a historical cultural aversion to entrepreneurship amongst the educated. If these business obstacles, including access to deep domestic capital markets, are not addressed, the likelihood of Brazil joining the ranks of global VC hotspots is low.
Brazil’s Future
Most investors believe Brazil is in a state of fragile growth where a select group of strong businesses will emerge from the current ecosystem, capitalize on technology and trends that will lead and achieve exits via strategic mergers and acquisitions or possibly IPO’s. This will lead to shallow capital markets holding Brazil back from achieving the VC industry growth profiles of China and India, and may ultimately cause investors to follow a more conservative approach towards committing capital to Brazil.