Innovation and Venture Capital in Brazil

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Briefing

Plus: Expert Q&A with Susana Garcia-Robles, Principal Investment Officer, Multilateral Investment Fund

Q32

013

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An executive summary of the Privcap thought leadership series on the Brazilian ecosystem for venture capital investment

Privcap Briefing • VC & Innovation in Brazil | Q3 2013 / 2

1. The ecosystem for innovation in Brazil has improved dramaticallyInnovation and venture capital in Brazil is “light years” ahead of where it was a decade ago, said Patrick Arippol, who began his career in Brazil, left to work in Silicon Valley in 2002, and recently returned to lead DGF Estagio Inicial 1, a fund focused on early-stage companies.

“The ecosystem is a lot more robust,” Arippol said. “We see the critical mass where you’re able to get a company off the ground, help the entrepreneur get to a significant

level, at which point they can see exits or interesting joint ventures.”

He compared the current state of innovation in Brazil with American entrepreneurialism in the 1990s. “There’s a long way still to go, but it’s substantially ahead of what it was 10 years ago.”

Marcus Regueira of FIR Capital agreed, noting that Brazilian entrepreneurs now understand much better the need for governance, management, and structure—“and what venture capital is all about.”

Innovation and Venture Capital in Brazil

Key Findings

1. The ecosystem for innovation in Brazil has improved dramatically2. Brazil’s culture of entrepreneurship is strengthening3. The VC business in Brazil is not entirely about “copycat” startups4. Impressive exits are driving further investment activity5. Brazilian innovation is exportable

Patrick Arippol Principal DGF Investimentos

The Panelists

Susana Garcia-Robles Principal Investment Officer Multilateral Investment Fund

Marcus Regueira Founding Partner FIR Capital

EXPERT TAKEAWAYS /

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EXPERT TAKEAWAYS /

Brazil still has significant hurdles ahead, cautioned FIR Capital’s Marcus Regueira. In particular, he pointed to gaps in the venture ecosystem, the largest of which is follow-on financing.

“There is still difficulty with follow-on fi-nancing rounds for the good companies in our portfolios,” he said. “Many times we have to go out and offer that to outside investors that sometimes have never invested in Brazil and are looking to Brazil right now.”

Overall, he believes the venture ecosystem needs more funds and more investors who not only can seed startups but can also take them to the next level of growth. “The eco-system needs more capital and more suc-cesses to make this true,” he said. “If we have really astounding results in Brazil, they will help push other successes.”

Challenges Still Exist

Marcus Regueira

“There’s a great difference in Brazil in the last six, seven years,” he said, crediting the Multilateral Investment Fund, Brazilian government regulators and the Brazilian Private Equity and Venture Capital Association [ABVCAP],.“They have literally changed the landscape and turned Bra-zil into a clearly enabling environment, one that’s differentiated from certain emerging markets that outside investors might have in mind.”

One of the most important enablers for entrepreneurs is the public’s new perception of them. “Before if you said you were an entrepreneur, people would automatically think, ‘Oh, you are in between jobs—the one you just were fired from and the one you’re looking to get,’” Susana Garcia-Robles of the MIF said. “Now to be an entrepreneur is something that gives you status.”

2. Brazil’s culture of entrepreneurship is strengtheningIt’s accepted wisdom in the U.S. that failure is a necessary precursor to success. But in many emerging countries, like Brazil, failure is stigmatized. But perceptions are changing, which is vital to the growth of entrepreneur-ialism in Brazil.

“Failure was never really accepted in the ’90s,” Arippol said, recalling that, even in the effervescent bubble years, entrepreneurs were regarded as a bit eccentric. “If you were doing startups you had to be a little crazy. Something was not right or you didn’t get a job. Whereas today, we’re on the other side of the pendu-lum, where there’s probably entrepreneurs doing it for romanticism—and they think it’s easy. We’re probably going to get a balance out of that but the cultural aspect has changed a lot.”

Garcia-Robles agreed that the ecosystem has evolved but added that there are still several items on her “wish list” for Brazil, including angel investors who have experienced failure and success to serve as role models for younger entrepreneurs.

Something else Brazil needs, she said: “The whole idea of “not apologizing.” To be on a stage and say, ‘I start-ed this company, I failed, I learned from these things, I

started another one and the story ends on a good note.”

3. The VC business in Brazil is not entirely about “copycat” startupsCopycat startups are popular in emerging markets—the Airbnb of Thailand, the Groupon of Turkey, etc. This was once a fad in Brazil, but the trend has tapered off.

“From 2001 to the middle of 2012, there was a wave where there were a lot of similar bets, two, three plays trying to do the same thing,” Arippol said. “Absolutely

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there are some good companies that will come from that wave. At the same time I think that investment thesis–the copycats that can be done because there’s nobody doing it—most of those have passed.”

EXPERT TAKEAWAYS /

Entrepreneurship in Brazil was once the ex-clusive domain of the economic elite. Today’s entrepreneurs come from many different backgrounds.

“There’s the young 23-year-old just out of university,” said Patrick Arippol of DGF Investimentos. “There’s the guy that has done two startups and now he’s starting a third and is really motivated to make this one work.”

There’s also the former corporate executive with a lot of experience and domain expertise who finally sees an opportunity to strike out on his own. And don’t forget the aggressive foreign nationals who are arriving in Brazil to tap the nation’s rapid growth.

“In the end, it’s not just one type of entrepreneur that will be successful,” Arippol said. “In some cases, it’s the person-ality combinations that end up really work-ing well. It’s the high-energy person team-ing up with a person who has his feet on the ground. It’s the yin-yang, if you will. Those teams can end up being successful.”

The Brazilian Entrepreneur Is Evolving

Patrick Arippol

A lot of the so-called copycats today might be termed “regional innovations,” imitative companies that fill a local need better than the (foreign) original can.

“What they are doing is adapting to the need of a mar-ket that the disruptive company from the U.S. wouldn’t know how to,” Garcia-Robles said. “So I think we have to detach the stigma of copycat, not talk about copycat, talk about adaptation of a technology and understand also that the innovation process allows for that.”

A local startup can take some other company’s innovation and tweak it into something unique. “To get there you have to go through an iteration process that wasn’t really disruptive,” Garcia-Robles said. “Then all of a sudden it got disruptive.”

4. Impressive exits are driving further investment activitySometimes the quickest way to exit is to follow someone else. Arippol cited a DGF portfolio company that he said is an imitation of two U.S. companies—Eventbrite and Ticketfly—and which, in his opinion, is “by far the best-positioned company in Brazil.”

He gave another example of a business-plan innovation that worked well for DGF: Mastersaf Brazil, a tax-soft-ware firm that helps companies handle the exceedingly complex Brazilian tax system.

“It was one of those situations where we got some interesting exit possibilities,” Arippol said. “The company is growing very nicely and we’d like to stay on. And the entrepreneur said, ‘For that amount of money, we want to exit.’ So in that situation we said, ‘OK, fine. We’ll exit.’”

5. Brazilian innovation is exportableInnovation flows out of Brazil as well, particularly in those categories where Brazil has years of experience and strength.

“We truly believe that where the money is in terms of venture capital in Brazil is in companies in large markets that you can muscle up and globalize,” Regueira said. “We like to look at where Brazil has the competitive

Privcap Briefing • VC & Innovation in Brazil | Q3 2013 / 5

EXPERT TAKEAWAYS /

advantage in the world and then we look at the companies that have the competitive advantage within that competitive advantage.”

For example, Brazil has one of the largest mining industries in the world. FIR Capital invested in a company that began by managing operations at Brazil-ian mines. FIR recognized its potential for growth and helped the company expand to mining operations in Peru, Chile, Australia and South Africa.

“It’s high technology for managing those huge excavators and trucks—trucks the size of a building,” Regueira said. “What we call managing the dirt out of the mines.”

The company is now expanding to the management of cargo, ports and other large logistics. “This is something that’s typically Brazilian—looking at the Brazilian market and saying, ‘Where can we really be true leaders in that field and fill a vacuum of need?’”

Fifteen years ago, universities in Brazil were not focused on commercializing their research. For the most part, they were interested in research as an academic exercise, a way to impress their colleagues, noted Susana Garcia-Robles of the Multilateral Investment Fund.

She recalled one talented academic who did start a company but he was still primarily focused on being a researcher, not an entre-preneur. “The environment was not helping him go and take that leap,” Garcia-Robles said.

Universities and research facilities simply did not promote entrepreneurship at that time. “Those people who no doubt had the capacity to produce disruptive technologies didn’t take the step to try to commercialize their research. Or if they did, they were met with skepticism and people saying, ‘Are you crazy? You can’t do that.’”

This is no longer the case. “Today we have accelerators, we have seed funds, we have angel networks,” said Garcia-Robles. “So now you don’t have to apologize for being an entrepreneur. Even the research centers and the academic world now understand risk, so that is a positive development.”

Risk Is No Longer a Four-Letter Word

Susana Garcia-Robles

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ABVCAP is the sponsor of this briefing and the corresponding thought-leadership series.

Expert Q&A Susana Garcia-Robles

Multilateral Investment Fund, IADB Advisory Board Member, ABVCAP

How have you seen the ecosystem for VC in Latin Amer-ica change since the MIF was formed?

The Multilateral Investment Fund formed in 1992, with the initial purpose of funding and executing

privatization in Latin America. Its focus has since shifted to boosting competition, entrepreneurship and job skills in the region. When the MIF started supporting venture capital funds in 1996, there weren’t many managers. Government agencies were one of the few investors.

Today, we see a different landscape. The global crisis created opportunities for our region because we fared better than the advanced countries. We were learning lessons on developing venture capital in an environment that was different from the UK or Silicon Valley.

Within the past five years, the MIF has realized that innovation is the best solution for development. For example, I recently proposed to the board an investment of $5 million for an accelerator program. It is based in Argentina but has a pan-regional focus. In 18 months, they have financed 75 technology entrepreneurs throughout Latin America, all touching upon various sectors. Some are developing solutions in green energy, while others are applying it to traditional sectors, such as education.

What should fund managers know before approaching MIF for investment capital?

Fund managers must have a clear investment strategy that matches the team’s skills. They should

know we don’t finance private equity; we do seed funds. Our mandate is early stage, so we expect to invest in more accelerators. We favor local managers because they are here to support their economies for the long haul.

Is the MIF aiming to strengthen its presence in certain untapped countries?

We haven’t backed any managers from Ecuador, although we have some investments through

local regional funds. We have a small seed fund in Panama and we’re operating an angel network in the Dominican Republic.

In 2000, the MIF supported the Brazil government’s launch of INOVAR, a program designed to stimulate the VC ecosystem. We are not trying to replicate the INOVAR model in Jamaica and Uruguay. It will be easy and quick to implement the program in these small countries because there are tighter networks between investors and innovators – everybody knows each other.

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Series / Innovation and Venture Capital in Brazil

Watch the series in its entirety at Privcap.com

Culture of Entrepreneurship

The Brazilian Way of Innovation

VC Success Stories from Brazil

Susana Garcia-Robles on Innovation