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Flashlight on the Brazilian startup scene in 2019

Coffee Break

Writer Frank P. Neuhaus Founder and director of iManagementBrazil Ltda. São Paulo - Brazil

Photos & Illustration's iManagementBrazil Ltda. Shutterstock, USA

May 2019

São Paulo occupies the 46th place in global ranking if it comes to install a new company, or better called start-up, rocketing up from „zero“. Beginning of 2014, the city occupied the 13th place. The severe crash is a tribute to the crisis of recent years. And whether it is really over cannot really be predicted at this point in time. On the other hand, Brazil, especially the region of the Metropolis São Paulo, has become a global start-up hub and has more than quadrupled its investments in new companies within two years. iManagementBrazil has handled several consulting and interim management projects for Brazilian start-up companies in various industrial sectors during this period. We got to know various incubation centers, investors and founders. With this coffee break we try to summarize our experiences. We also hope that even more foreign investors will be interested in Brazil as an attractive start-up location. We are sure that the market is much more attractive today than it was in the boom times before the crisis.

Several surveys took in account a large number of important aspects for the birth, development and the success of the start-up. São Paulo was qualified among the highest ranking at the Mentality Index, occupying the 7th place globally. This indicator measures how much

the new business founder is a visionary, resistance, level to take risks, ethics and the capacity to overcome challenges. Another highly ranked factor in favor of the paulistanos is the Ignition Index where São Paulo reached the 14th position. In this case, the index m e a s u r e s h o w m u c h t h e entrepreneur really achieves his goal to open and start the new venture. Looking to the end of the ranking, São Paulo occupies a modest 27th place if it comes to the Talent Pool Index. One of the most globalized indexes among the survey is called the Trendsetter Index, where São Paulo even occupies a modest ranking - only 22nd place. São Paulo and Brazil have another poor ranking in the area of financing opportunities. But exactly this point seems to turn rapidly into the opposite. Ecosystem. São Paulo is the first and major powerhouse if it comes to the real ignition of the new venture. The venture capital environment in the city is vibrant and able to contribute the local companies significantly. The local funds, concentrated on advanced start-ups, are able to rocket the paulistano ventures to the stage of a local leader or even turn them global. Several recent surveys indicate São Paulo as a very interesting target for international seed investors. Comparing the large global metropolises, the fast growing and improving infrastructure of the City of São Paulo deserves a major respect either. Considering that the l a rger São Pau lo area hosts approximately 22 million habitants, the effort and challenges are incommensurab l e w i th , e . x . , European cities. Following several surveys, the majority of paulistano start-ups is ventured by men. The average is 30.8 years, slightly inferior of the average in the Silicon Valley with 32.1 years. The average working load per day is 9.0 hours in São Paulo, meanwhile the average of the American counterpart is on almost 10.0 hours. Fintechs are up and rocketing. Brazilian Nubank’s US$ 150 million Series E round in March this year, led by Russia’s DST Global, brought the total raised by the five-year-old online lender to US$ 330 million. Nubank now claims to be the biggest fintech by customers outside of Asia, with 4 million credit-card holders and 1.5 million current

account holders, one of the biggest fintechs on globe. Accounts are opened online and there are no fees - a revolution for Brazil’s red-tape ridden banking sector. That explains why Nubank has been able to grow faster than any other digital bank in US and Europe, even though the macro-economy has been far worse.

Brazil this year produced two so-called unicorns, privately held companies valued at more than US $ one billion, in the shape of Nubank, the country’s largest fintech business, and 99, a cab-hailing app acquired by C h i n e s e c o u n t e r p a r t D i d i Chuxing.  Institutional investors that traditionally wouldn’t look at venture capital, or for which technology wasn’t an area of focus, are all really interested in venture capital and tech deals now. Known for its high costs and bureaucracy, Brazil’s economy is dominated by traditional companies in areas from banking to transport and healthcare, making it an attractive target for agile technology start-ups, investors say.  Fintech in g enera l has been a popu la r investment in Brazil, with other businesses including Creditas, a s e cu r ed l o ans s t a r t - up, and PagSeguro, a payments company that held an initial public offering in New York, raising money. Investment structure. Behind Brazil's most valuable startups, there is a group of investors with a lot of money in their pockets and little fear of making a mistake. Gathered in investment funds, they specialize in

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prospecting for ideas that can become millionaires, as in the case of Nubank, Moviel, Stone, 99, PagSeguro and GymPass, Brazilian companies that have become unicorns by exceeding the mark of one billion dollars in market value. Since the beginning of the wave of digital entrepreneurship almost a decade ago, funds have contributed almost US$ 7 billion to Brazil. In 2018 alone, venture capital funds invested US$ 1.3 billion, 51% more t h a n i n 2 0 1 7 . T h e a m o u n t represented 65% of all investments made in Latin America in this startups sector. The first numbers of 2019 indicate that investments should continue to rise this year as well. In mid-March, Japanese giant Softbank announced the launch of a US$ 5 billion megafund to invest in s t a r tups in the reg ion . The expectation is that more than half of the resources will be allocated to Brazilian companies. This appetite is part of a movement initiated in recent years by funds such as Monashees, K aszek , RedpointEVenture, ValorCapital and 500StartUps. The focus of these investment companies is on hunting u n i c o r n s f r o m B r a z i l . T h e investment logic is different from that applied by other market funds. With greater risk appetite, they invest between $25 million and $75 million in several companies at the same time. They know that most of them will stay halfway there, but those who succeed will compensate for the failures. The sale of 99 to China's Didi has yielded investors 60 times the amount invested. The business value was almost US$ 1 billion.

It is also not easy to find an idea capable of becoming an unicorn. Leaving the analysis of the funds, the acceptance rate is only 1% to 3%. The case of the American 500StartUps seems quite interesting. In Brazil, the company has already invested in 40 startups and has yet to emerge from none. The chance of becoming several unicorns seems quite probable.

In a country like Brazil, where credit is scarce and expensive, these investors have become the main source of funds to develop business at an early stage. During 2018, venture capital contracts rose by 140%, the previous year, there was already an increase of 130%. Even with the economic crisis, the activity of these funds has never been more intense. It seems that venture capital investment companies have begun to discover Brazil. The current figures indicate that the contribution of venture capital could double this year again. Focusing Brazil. Brazil accumulates 65% of all investments in start-up companies in Latin America, including Mexico.

Demographics are also behind the growth of technology-driven start-ups in Brazil, as  Brazil’s large and aging population fuels demand for healthcare. Telemedicine services are growing fast in the urban and remote country side areas.  Through technology, Brazil has been able to make healthcare more accessible and cheaper. The new digital B2B models in the health care sector are decreasing the costs by up to 28% at private sector clinics in a country whose public health system is free but notoriously inefficient.  To be sure, Brazilian start-ups remain minnows compared with their established competitors. Brazil’s largest private sector bank, Itaú Unibanco, for instance, had more than 30 million credit card holders as of end 2018. Brazil’s traditional banks are also known for their sophisticated financial technology

and are busily developing rival mobile banking services.  And while investors in fast-growing companies are not typically too f o c u s e d o n m a c r o e c o n o m i c considerations, some investors said to us Brazil’s volatile currency was a deterrent for some.  Managers of Nubank Russian investor DST Global, said to us that the company expects Brazil to grow as a technology fintec hub over the next five or 10 years.  Brazil has a large market, a pretty tech savvy p o p u l a t i o n w i t h a t t r a c t i v e d e m o g r a p h i c s a n d d e c e n t engineering and computing talent. Brazil has all the right ingredients for an ecosystem to be developed. The financing companies. The evolution of the venture capital industry in Brazil closely follows the m a t u r a t i o n o f t h e s t a r t u p s ecosystem. The investment of venture capital funds in new Brazilian companies has more than quadrupled over the last two years. With the cases of 99, PagSeguro, Nubank and recently QuintoAndar, Brazil has produced four unicorns in a very short time. In all, 292 companies worldwide are considered unicorns at this time, according to research firm CB InSights. It means that in record time, Brazil created 1.4% of this universe. Through our projects and the network of contacts in the Brazilian startups industry we observe that the next two years tend to be very good for the entrepreneur who has billing, va l id produc t , in sea rch of investment to scale the business and accelerate growth. The industry of seed and venture capital investment companies operating in Brazil is small and has room to triple in size and number of investors during the next two to four years. (FPN)

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40%

30%

30%First-time entrepreneur

Failed first-time entrepreneur; success with the next startup

Third-time success

TARGETING 2015-2018

The focus of the start-ups is on applications in transport, supply and FinTec/payment systems. The main target group is the São Paulo metropolitan complex with its rapid geographic expansion.

TRANSPORT

FINTEC

,

PAYMENTS

SERVICES

AGRICULTURE

REAL ESTAT

E

Life Cycle

25%OF STARTUPS FAIL

AFTER ONE YEAR

46%OF STARTUPS FAIL

AFTER TWO YEARS

33%OF STARTUPS FAIL

AFTER THREE YEARS

The second year is very critical.

INVESTMENTS 2016 - 2018

Investments in Brazilian start-up companies have more than quadrupled in the last four years. This makes Brazil one of the fastest growing start-up markets in the world.

US$ 1.3 BILLION 2018

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São Paulo 60%Sao Paulo offers the best combination of infrastructure and qualified professionals. However, the region around Porto Alegre has pursued an intelligent policy of attracting start-ups over the past two years.

LOCATION

HOW TO START A

STARTUP In Brazil ?

US$ 0.64 BILLION 2017

US$ 0.32 BILLION 2016

Porto Alegre 15%

Rio de Janeiro 10%

Belo Horizonte 15%

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Stages of Start-up Investments in Brazil

Pre-Seed

business partner, incubator, angel investor, crowdfunding

business evaluation

investment from US$ 25.000,00 to US$ 125.000,00

Seed

venture capital funds, angel investor, crowdfunding, business partner

product in the market

investment up to US$ 750.000,00

A-Sequence

venture capital funds

proof the business model

investment from US$ 750.000,00 to US$ 7.5 million

A, B, C and E-Sequence

venture capital funds

economies of scale

investment from US$ 7.5 million to US$ 75 million

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0

50

100

150

200

0 75 150 225 300

DeclineMatureGrowth

Start-up Lifecycle in Brazil

Digital Media

AdTec

Gaming

CleanTec

BioTec

Health & Life Sciences

FinTec

EdTec

AgTec & New Food

Big Data & Analytics

Blockchain

Advanced Manufacturing & Robotics

Exits Growth (5 years) in percentage (%)

Ear

ly S

tage

Gro

wth

(5 y

ears

) in

perc

enta

ge (%

)