The conference brought together nearly 700 local investors and a delegation of international corporations.
Augusto Pestana, business director of Apex-Brasil, opened the fifth annual Corporate Venture in Brasil conference with a key message: “Brazil will succeed.”
In many ways, Brazil, the biggest country in Latin America, already has. It is the eighth-largest economy in the world, according to CIA’s World Factbook, and is a member of the trade bloc Common Market of the South (Mercosur) with Argentina, Paraguay and Uruguay.
The Brazilian startup and innovation scene has had plenty to offer in the past decade, even to the most demanding corporate venture capital (CVC) investors. ApexBrasil now tracks more than 100 local corporations active in innovation, up from effectively zero at the first Corporate Venture in Brasil conference in 2014. They are encouraging more startups, with more than 5,000 entrepreneurs logged by ApexBrasil.
Capital committed to venture capital funds has increased three-fold from 2015 to end-2018 to R$16.6bn from R$5.4bn, according to local trade body ABVCAP. This has helped deliver a five-fold increase in dealmaking value, with R$6bn in 122 VC deals last year, plus 89 where values were unknown, compared with R$1.2bn in 96 deals back in 2015, ABVCAP added.
GCV Analytics has tracked 131 investment deals in Brazil-based emerging enterprises involving such investors since 2011 and CVCs have been behind the rise in average deal value to R$50m in this period. All the top 10 investments in 2018 and 2019 included a CVC, led by Tencent’s backing fintech Nubank, Naspers backing IFood, SoftBank’s investments in Gympass, Loggi and Creditas and Qualcomm investing in Quinto Andar.
The country’s appeal
Alexandre Arantes Villela, a managing director of Qualcomm Ventures, mobile semiconductor technology producer Qualcomm’s corporate venturing subsidiary, who oversees Latin American deals, explained the country’s appeal. He said: “By far, Brazil has the largest population – 35% – and GDP – 41% – in the region. It is a continent by itself. Brazil has enough critical mass to accommodate large, public companies only serving its domestic market.
“The consequence of this, added to the fact that Brazil speaks Portuguese, while the rest of LatAm speaks predominantly Spanish, is that many Brazilian entrepreneurs are less focused on international expansion, as compared to their peers in Argentina and Chile, for instance.
“This is changing over time, and now we start to see cases of Brazilian companies that very early on their journey decide to undertake regional expansion. Latin America is not monolithic. Countries are widely different, especially from an economic and political standpoint. Brazil’s economy was deeply affected from 2014 to 2017 when it had a severe GDP shrinkage.
“The reality is that since then the country is recovering and governments are slowly implementing some of the necessary reforms in the economy. The government is also about to approve a necessary reform in the pension system which will be a gamechanger for the country. Brazilian institutions have also fought corruption and frauds in the last few years, and this going to represent an enduring legacy for the country. Overall, I think we are on the right path.”
Above: Jayme Queiroz
Thais Cristina Perico de Sousa, an investment manager for BASF Venture Capital, Germany-based chemicals company BASF’s CVC unit, who was a GCV Rising Star this year and was just completing her first deals in the country for her new parent at the time of the conference, added: “Brazil’s ecosystem has been able to increase its density supported by the private sector, and I believe that is one important aspect that differs our VC market from to others in the region, especially the Chilean one – the second in LatAm rankings.
“This source of funding seeks here segments where we already show competitiveness, such as fintech and more recently agtech which is one reason why these Brazilian techs present a higher number of startups compared to our neighbours in LatAm.
“Another interesting aspect is related to the target market: Brazil is a 220 million people market, so the bulk of Brazilian entrepreneurs focus on the local market when building their product, while an Argentinean company should fill its customer list with foreign clients as quickly as possible plus establish offices outside Argentina – due to the political and economic scenario in the country and also due to the limited size of its market.
“Now, checking the financial performance, I believe it is too early to tell. It was just in 2010 that the VC movement in Brazil started to increase and it ramped up only three years ago. We are just seeing second and third entrepreneurs right now. Any statement regarding the quality of LatAm VC market would be very limited.”
Multinationals move in
Many of the CVC investors in Brazil are subsidiaries of multinational corporations, such as Qualcomm, chipmaker Intel, media and e-commerce group Naspers, telecommunications and internet group SoftBank, telecoms firm Telefónica and investment banking firm Goldman Sachs. The biggest domestic corporate players include mobile and entertainment service company Movile, media conglomerate Grupo RBS and aerospace conglomerate Embraer.
SoftBank has been the most active large international investor in Brazil in the past year, having set up a 15-person team in São Paulo under managing partner Andre Maciel. SoftBank, which invests through its international group as well as its near-$100bn Vision Fund, has targeted $5bn for LatAm, including a reported $500m to be limited partners in venture capital funds locally for the earlier stages.
In the keynote, Maciel said his team had been so busy they had barely slept in the past six months. SoftBank’s deals had covered a spectrum from fitness (Gympass) to ecommerce delivery (Loggi) and fintech (Creditas) with an overarching theme of data. But other sectors are also increasingly active.
Regarding the CVC scene in Brazil, Kieran Gartlan, who has since December 2018 been managing director for early-stage agricultural technology accelerator The Yield Lab, said Brazilian corporations have yet to embrace the agtech sector fully. “Currently, I only know of one – Algar [the venture capital branch of Brazil-based conglomerate Grupo Algar] – and agriculture is only a small part of their overall business,” he noted.
Clau Sganzerla, vice-president of strategy and innovation at Algar, explained: “When Algar started its corporate venture arm three years ago, there were a handful of local Brazilian corporations with similar initiatives.
“We observed exponential growth in the corporate venture space in terms of numbers of deals, deal size, venture capital commitment and the number of local corporations entering into this ecosystem.
“The increased market liquidity and our learning process over this period of time led us to be more selective and more focused in terms of our investment thesis.”
Gartlan added: “There are several companies beginning to look at setting up their own CVC, and I imagine by this time next year [October 2020] we could have four or five ag CVCs. Compared with other LatAm countries, this is basically the same situation and, if anything, Brazil is slightly ahead as ag corporates here tend to be bigger, with more resources.”
BASF’s Perico de Sousa held a comparable viewpoint, as she considered fintech to be a hot segment in Brazil and agtech a close second. “Additionally, I would bet in new business models and platforms related to nutrition and health and personal care.”
The majority of Brazilian enterprises that CVC investors found the consumer, IT, fintech and services sectors attractive.
Algar’s Sganzerla agreed that agtech, fintech and edtech were trendy because these were areas where the local market was huge and there were a lot of pain points to tackle, therefore disruptive business models and technology could emerge.
Gartlan added: “Agtech is currently the hottest vertical in Brazil. We are also seeing fintech take note of the opportunities in the ag sector and hence the emergence of ‘agfintech’, such as startups addressing credit, logistics, insurance and marketplaces related to ag. Our first investment in Brazil is an ‘agfintech’ called TerraMagna, which uses satellite imagery to provide risk management solutions to those financing farmers.”
Agtech enterprises based in South America and backed by corporate investors remain relatively few but are still expected to grow in number.
Sganzerla, however, noted: “There are also tremendous opportunities in many other areas since the local market as a whole demands much higher levels of productivity; a good place to start up new business models.”
Bruno Loreto, who featured on the GCV Rising Star roster this year and was head of operations at Construtech Ventures, the corporate venturing arm of Brazil-based SoftPlan Systems, co-founded a VC firm called Terracotta Ventures in August this year.
During this transition, Loreto has noted strong movements in the Brazilian CVC market. He said: “Many corporations have done direct investments in startups looking for strategic synergies.
“Some of them have started discussions about the creation of a CVC arm.” He mentioned Cogna Ventures, the soon-to-be-launched corporate venturing unit of Cogna Educação, the educational services provider formerly known as Kroton Educacional, pharmaceutical firm Eurofarma, conglomerate Andrade Gutierrez and steel producer Gerdau.
Above: Thais Cristina Perico de Sousa
“I can see a favourable moment for the CVC environment in the next two years. I am not directly involved with other LatAm markets, but my impression is that the stage of development of CVC firms follows the advances in the startup ecosystem as a whole. So, Brazil is one step ahead comparing to Mexico [which has a group of 20 CVCs developing around Femsa Ventures and AC Ventures], Chile, Colombia or Argentina’s markets.”
Loreto has been concentrating on construction and property technologies, but he has seen strong movements in fintech, healthtech, agtech and construtech. “During the past 12 months, almost $250m has been invested in construction and real estate tech companies in 24 different startups. Some corporations have participated in early-stage rounds. We also have seen more companies talking about M&A activities targeting startups.”
Round the country
The most common disclosed rounds raised by Brazilian startups have been seed and series A funding. However, many deals have gone undisclosed, particularly since 2014, including the 89 of undisclosed value last year.
Gartlan added that CVC activity in agtech is going through the same development, stating: “There has been a huge transformation in the agtech ecosystem over the past one to two years. In the past year alone, the number of agtech startups has tripled to around 1,125 from 350 last year. Also, there are a number of new innovation hubs appearing across the country – as well as the main one in Piracicaba, there is a new one opening in Cuiaba, the main farming region of Mato Grosso, and others in Londrina, Bahia, Ribeirao Preto, Uberlandia and so on.
“This increased the number of startups and the emergence of agtech innovation hubs makes it easier for us to find dealflow and identify good investments.”
The Brazilian tech ecosystem in general has grown remarkably, as Qualcomm’s Villela explained: “The progress in the VC ecosystem is absolutely remarkable. Brazil has experienced a step function both in supply and demand sides of its VC.
“In the supply side, it is becoming very common to have tech professionals, many of them trained in Silicon Valley, that decide to return to Brazil as to have their first entrepreneurial experience. In the demand side, we also see a growing interest from international funds, attracted by the fundamentals of the country including large, yet underpenetrated markets, sizable middle class, large and diversified economy and democracy.
“Despite mediocre GDP growth in the last few years, it is fair to say that the best tech companies in Brazil have a growth profile that is completely unrelated to the country’s GDP growth. This fact, combined with a relatively less competitive market and lower valuations – as compared with the US and China – is attracting new funds to invest in the region. From a risk-return standpoint, Brazil might represent the best opportunity in the world right now in VC.”
Family-backed investment firm Lorinvest’s exit of startup New Steel to local mining giant Vale for $500m after an estimated $70m of growth equity caught people’s attention. One international CVC said he had joined GCV’s delegation to the Corporate Venture in Brasil conference as a result. He added: “If this was Silicon Valley the startup would have needed to raise $300m but as this was Brazil the deal flew under the radar of the main VCs.”
Villela said Brazil had some unique characteristics. “To give one example, historically companies and individuals have very limited access to credit – it used to be like a luxury good in the past – and equity has been historically scarce, too.
Above: Nolan Paul
“The consequence of the lack of capital is that, different from the US, most of the industries are very fragmented. The reason being no company had enough capital to command a consolidation strategy in the sector. This is obviously changing over time, but – on average – industries are far more fragmented than in other geographies. This represents a very good opportunity for aggregators or vertical marketplaces, whose market power comes from connecting a fragmented customer and supply basis.
“In general, I also like companies instrumenting offline-to-online (O2O) transformation, which means companies that are digitising bureaucratic and paper-based processes in an efficient way. We see, for instance, companies in proptech, legaltech and edtech spaces executing O2O strategies quite well.
“Fintech is a large opportunity, too, as opposed to many other sectors explained before. The banking system in Brazil is very consolidated with only around five players. Despite relatively low inflation, Brazil has one of the highest interest rates in the world, not to say that banking tariffs are also very high. Financial services are a sector that is prone to disruption and many innovative startups are executing incredibly well to reinvent the sector.
Above: Paulo Silveira
“Finally, I am very bullish on the long-term perspectives for internet-of-things (IoT) in the region. In general terms, IoT means the ability of a device to communicate to the cloud, without human intervention, for the purposes of decision making. Brazil needs to rearchitect entire sectors such as logistics and manufacturing, in order to have a necessary jump in terms of productivity. IoT is already one of the pillars of digital transformation and, in mid-term, will be massively adopted by companies of all sizes in the country.”
Villela added that Qualcomm Ventures welcomed co-investors and has partnered other VCs and CVCs in every single deal it has executed in the region. He said: “We also see strategic interest from the government to foment the industry, applying some of the best practices we see in other places in the world.
“Brazil has implemented a regulatory framework for VC and PE (private equity) that is sophisticated, and the government authorities are very open to listen to feedback and finetune the regulation. Qualcomm Ventures is present in LatAm since 2012. We have a good dialogue with the whole local ecosystem and welcome cooperation.”
Laws and challenges
Carlos Marques from the Ministry of Science, Technology, Innovation and Communication of Brazil in the keynote set out its new informatics law, which allows part of the gross revenues of tech companies to be invested in research and development and innovation by way of investment funds (called FIPs) whose portfolios consist of tech companies. However, the change to allow funds to be recipients (amendment 13,674/18) has been ruled illegal by the World Trade Organisation and Brazil has until the end of the year to appeal before the European Union and Japan can enact countermeasures, according to Guilherme Potenza, partner at law firm Veirano, which hosted the GCV Academy in São Paulo.
Above: Andre Maciel
But aside from the legal challenges to opening up the market, there is a collaborative spirit among stakeholders in the corporate venturing ecosystem as so many have started CVCs at around the same time. Sganzerla explained the way Algar operates is also through collaboration. “Open innovation is in our DNA since the beginning,” he said, “so virtually every initiative we have is coordinated with other players.
“We are a limited partner in a CVC fund [BR Startups]; we engage constantly with VCs to discuss co-investment opportunities and deal flows; we participate in innovation events together with universities – for example, Unicamp and Uniube – and official agents.”
BASF’s Perico de Sousa said this was reinforced by similar approaches by the international investors coming to Brazil. She reiterated that collaboration was key to success and added: “BASF Venture Capital has been building a strong connection with VCs, especially the ones we see as potential co-investors. Government agencies, like ApexBrasil, have been supporting our connections and are very relevant for us, due to the market monitoring they keep doing, the links between local and international players, and the discussions they rise.”
Unlike the US, however, it is still uncommon for CVC and VC investors in Brazil to collaborate with universities, she said.
Gartlan said The Yield Lab has a separate organisation called The Yield Lab Institute, which works with all the players in the ecosystem to help grow it and spread information, and added: “One of the first projects we did in Brazil was a white paper study on the Piracicaba agtech ecosystem, together with Washington University in St Louis and Esalq (Brazilian Agricultural University).
“We spent several months mapping out the ecosystem, interviewing all the players and evaluating all the factors that have led to its success as well as areas to improve. We hope this study will give Piracicaba more visibility on the international scene and also serve as a model for other innovation hubs to follow.”
As Jayme Queiroz at ApexBrasil in closing the conference said: ”Go Brazil, go!”
ABVCAP and others are bringing a delegation to the Global Corporate Venturing & Innovation Summit in Monterey, California, on 29-30 January and is supporting the annual GCV survey in English and in Portuguese:
