Venture-backed Brazilian startups had their best half-year ever in 2021.
Investments by local and global players surpassed $5 billion.
To help us understand the main elements that is fueling this trend, we spoke with an entrepreneur-turned-investor.
Back in 1998, Rodrigo Borges co-founded comparison shopping service Buscapé and participated in all investments rounds with Unibanco and Merrill Lynch (2000), Great Hill Partners (2005) and the successful exit of US$ 342M to Naspers (2009).
In this interview he talks about his journey; some of DOMO’s portfolio companies such as Hotmart and Gympass; his latest deals; and explains why Brazil has become a major target for foreign investors.
BayBrazil: Back in 1998 you started building price-comparison site Buscapé. The startup developed into a successful business and, in 2009, was acquired by Naspers. The deal of $342M became historic in the Brazilian entrepreneurial scene at that time. It was a quite different market. How was it then and how is it now?
Rodrigo: Buscapé started in 1998 and the following year we launched the site. During this period there were some transitions, both on the technical side, with the evolution of the internet, and on the commercial side. Looking at the technical side, a big change made other businesses viable: the emergence of cloud computing.
This made it much easier for new players to enter the market. With cloud servers, all the hardware was simplified so entrepreneurs could start their businesses and focus more on software and product development and system and processes.
This was a breakthrough in the system and development. And, another one was the emergence of social networks. It enabled our customers both to promote their businesses and to improve communication with their own customers. Beyond fashion, design, decoration, companies started to sell a lifestyle fueling another revolution, e-commerce.
Perhaps the big turning point – if not the biggest watershed – was the mobile, more specifically the smartphone. Consumers started using apps for everything, from listening to music, reading news to ordering food and banking. It substantially simplified the way our clients sell and interact with their customers.
BayBrazil: Fast-forwarding to 2021, venture-backed Brazilian startups had their best half-year ever, investments surpassed $5 billion. What are the major facts driving it?
Rodrigo: There is a big factor behind all this: the demand for technology is increasing and being tech is getting more and more valued in the market. Technology companies such as Facebook, Amazon, Google, Netflix are gaining a lot of space in public equity. Looking at Brazil, some factors contributed to this need for digitization. The market has created vehicles, people are seeking to understand investment in technology and venture capital.
Another factor is that in our market there are many opportunities, with several sectors looking for better solutions. Some consolidated players no longer serve the customer as well, which opens doors for the entry of a startup to bring innovation, quality in service, intensive use of technology to disrupt a sector. Alongside this, there is a drop in interest rates, so investors who once focused on fixed income investments are now driving these long-term, liquid investments. I believe that Latin America as a whole has shown how investing in startups today is a profitable business ready to solve problems.
BayBrazil: Investments in Brazilian startups are pouring in from both local and global investors, including Silicon Valley’s growth equity firm TCV, which backed one of your portfolio companies, Hotmart, and has also invested in powerhouses such as Netflix and Airbnb. Startups Loft, Nubank, Gympass and many others have also been backed by international investors. Is this trend here to stay?
Rodrigo: I believe and hope so. Foreign investors come to the country to invest in long-term projects. It is not capital that comes in and goes out. This long-term risky investment will create new companies, finance successful ones, generate jobs, develop technology here in the country, hence the hope that this flow will continue. Previously, we saw a first movement in which funds looked at Brazil with opportunism. However, they soon began to see the country as a source of exceptional cases, investing more seriously in businesses. Today, the country is one of the main targets of foreign investors, if not the main one. In addition, we have success stories of Brazilian startups that have expanded internationally and are starting to enter the American market, such as: Hotmart, which today operates in Mexico, Colombia, Europe, and Gympass, which is already operating in 15 countries.
This expansion of Brazilian startups abroad is attracting the attention of international funds. Brazil has become mainstream for investment.
BayBrazil: The pandemic has had a devastating impact in the Brazilian economy. Unemployment has surged and GDP dropped 4.1% in 2020. Although there was some gain in February of 2021, a recent study by SEBRAE shows that small businesses are reporting revenue losses. What is your view of the recovery? And, what is your advice for early stage companies that are struggling right now?
Rodrigo: This question is perhaps one of the most difficult to answer, as there is still a lot of doubt about the evolution of COVID (from the delta variant), vaccination rate. Understanding how this recovery will be is difficult, as it is the impact on health and even psychological effects after COVID. But, what we see is that some companies are starting to give a positive signal, even those that suffered the most during the pandemic. Some managed to sustain themselves and there are also those that tackled a problem by offering a solution and ended up growing a lot during this period.
We are now seeing a recovery, but it is very difficult to know what that recovery will be like. What we see a lot, in general, is that Brazilian entrepreneurs are very creative. Not only tech entrepreneurs but also those in traditional businesses are using technology to adapt. In our portfolio, for example, there is a company called Goomer, which helps small establishments and restaurants with delivery. The free platform allows restaurants to create digital menus and take orders without paying commissions. An exceptional solution for an industry that has suffered a lot.
One piece of advice for Early stage companies is that the worst is over. Go on with your business because the trend is only to improve. But if it is an industry that is still experiencing great difficulty, I would wait a little longer before entering the market to seek investment.
BayBrazil: The pandemic has accelerated innovation adoption in some sectors, such as health. In contrast, there is much to be done to bridge the digital divide and about 25% of Brazilians don’t have internet access. What are some of the top priorities for things Brazilians need to build – both in the private and public sectors – to be more competitive globally?
Rodrigo: The first step is to provide access to technology and internet connection for the population.
On the other hand, it is not enough to promote access to the internet without the individual being able to make online transactions, use products and services. We had a significant evolution with the PIX – the instant payment system created by Brazil’s Central Bank – which had great adoption. Of course, there are always the traditional problems, which are the cost of Brazil, the tax burden, bureaucracy and the complexity of operating here. But, the pandemic and the home office broke local barriers. Companies around the world are looking to Brazil with the objective of hiring talent from here. I see that our biggest challenge in the country now is to train more technicians and developers who understand technology so that they can create competitive businesses.
BayBrazil: Tell us about DOMO’s latest investments.
Rodrigo: Currently, our portfolio has more than 60 companies. A specific area that excites us a lot is insurance, where we had two investments recently.
One of them is Flix (insurtech 100% digital specializing in home insurance) and the other is 88i (digital service app for contracting insurance and assistance, which connects brokers and customers).
Another investment we made recently was in Digital Inovation One, an educational software development platform that connects companies with the best programmers. The idea is to create online bootcamps to qualify the workforce of developers.
Our lastest investment was in Semexe, a digital marketplace for new and used cycling-related products. The company has been growing as more people look for alternative to gyms.
We also actively investing through our angel Fund, focused on early stage startups, and our Enterprise Fund, focused on B2B startups.
