Brazil: A look into Latin America’s largest startup ecosystem

In September 2012, Forbes published a lengthy feature heralding Brazil’s arrival as “one of the most entrepreneurial countries in the world.” At the time, the South American giant had been powering through a global recession, with growth rates that drew the envy even of its surging companions in the emerging-market bloc.

Roughly 25 percent of Brazil’s workforce was self-employed in some capacity, and small businesses were accounting for two-thirds of private sector job creation in a rapidly diversifying economy that had already produced record reductions in poverty and unemployment.

This was a cause of tremendous enthusiasm, and Forbes was far from the only one to take notice.

The details of Brazil’s decline from that high-water mark have been recounted many times in the last four years. Political corruption, fiscal mismanagement, falling commodity prices and stagnation in China converged to bring about a dramatic reversal. Overnight, Brazil went from historic boom to the country’s worst economic crisis in decades. With so much negative attention on Brazil’s many and serious problems, it’s easy to overlook a counterintuitive truth about the country’s burgeoning startup scene: The overall outlook has not changed.

With more than 200 million people, Brazil is still the most populous country in South America, as well as its largest market. Internet penetration and use are still high — Brazil trails only the United States in total Facebook, Twitter and YouTube users — and the country still has more mobile devices than human inhabitants. The only Portuguese-speaking country in Latin America, Brazil is still uniquely positioned to capitalize on regional markets and is artificially devoid of international competition.

But big impediments remain. Economic downturn has done nothing to diminish the notorious labyrinths of red tape Brazil’s indecipherable bureaucracy erects around even the most straightforward certifications, transactions and licensing processes. At 14.25 percent, interest rates are high for the returns your average Silicon Valley VC fund could expect to see on a given portfolio, rendering entrepreneurship needlessly risky for many investors who might otherwise be interested in backing promising businesses. Antiquated labor laws and tax codes, crumbling or non-existent roads and an overburdened university system are just some of the longstanding barriers entrepreneurs continue to face in the country.

Yet Brazilians are famous for innovating around inefficiencies, and their own attitudes tell a different story than the dire headlines of the business press. Fundacity — a network for startups and investors — has found that education and healthcare, two of Brazil’s most chronically troubled sectors, are precisely the areas investors are most keen on. With the national mood plunging toward despair in the first semester of 2015, Brazilian accelerators, VC funds and angel networks nevertheless backed at least 195 startups between them.

Those combined investments accounted for just under 7 percent of the total capital taken in by startups that semester, which suggests something else about Brazilian entrepreneurialism foreign observers would do well to make note of: the potential remains enormous.

Much needs to happen before that potential can be realized, but as Juliana Vasconcelos, from Brazil’s government investment agency Apex, put it at the Venture Capital in Brazil Forum in Menlo Park this past September, “crisis creates opportunity.” There’s as much, if not more, reason to take stock of the Brazilian startup economy now as there was in 2012, when the country was at its most ascendant.

Origin story

The story of Brazil’s startup scene starts long before those of most of its South American counterparts.

TOTVS was founded in 1983 and has been a constant presence in the national ecosystem ever since. Today it supplies business software to around 60 percent of Brazil’s small and medium-sized businesses, making it by far the most successful Brazilian tech company, and the country’s 22nd most valuable brand overall. The largest software company in South America — the company now boasts 26,000 active users and 10,000 employees — TOTVS also claims to be the only one with a proprietary software development platform.

1983 was also the year that the Brazilian government, still operating under military rule at the time, created the Associação Brasileira de Private Equity & Venture Capital(ABVCAP). Other government initiatives to foment entrepreneurship have fizzled out, but ABVCAP is still active, organizing networking and promotional events like the annual Brazil Breakfast, set to take place in New York in late September, and Brazilian Venture Capital Conference, set to take place in São Paolo in late October.

It took many years for the private sector to start developing a significant venture capital presence of its own. But in 2000, Inseed Investments, Inventta consultancy, Tropos Lab and a biotech firm called Ecovec came together to form the Instituto Inovação Group, the foremost business generator in Brazilian innovation.

By 2002, the local scene had developed to the point that the outside world was looking to get involved. Google picked São Paulo for the site of its first Latin America office, a decision vindicated in the steady stream of talent that continues to flow through its doors from across the region. Three years later, TOTVS went public on the New Market of the Stock Exchange of São Paolo, becoming the first Latin American IT company to IPO.

Brazil’s first major acquisition followed soon after, in 2006, when a South African conglomerate purchased a 91 percent stake in Buscapé, a compare-and-shop e-commerce site. At $374 million, the exit, still one of the country’s largest, helped encourage further investment in the market. In 2009, Cassio Spina, an entrepreneur, founded Anjos do Brasil, a nonprofit angel network dedicated to keeping the trend going. In 2011, Redpoint Ventures, a California-based VC fund, and e.ventures raised $130 million to invest in early-stage Brazilian companies.

The 2012 Forbes article came out as the Brazilian startup scene seemed poised to make a major leap. In 2014, the transport app Easy Taxi raised $40 million in Series D funding — from Phenomen Venture and Tengelmann Ventures, among others — for an expansion into Latin America and Asia. Based on the innovative model from Start-Up Chile, Start-Up Brasil launched later that year, with a mandate to attract foreign entrepreneurs to the local consumer market and foment domestic entrepreneurial culture. Backed by $78 million from the government, it was meant to be the culmination all the momentum Brazil had been building.

Within two years, of course, that momentum would be largely gone, and Start-Up Brasil along with it. But measured against the collapsing expectations, the Brazilian startup scene performed impressively. In the past year, Google’s Brazilian campus — Google São Paulo — announced its first batch of resident startups. YouTube Gaming and Instagram for Business have both planted flags in the country. An array of national businesses have completed impressive fundraisers, from the pet-sitting marketplace DogHero ($3.1 million) to the B2B sales software firm Exact Sales ($1.2 million).

São Paolo: The financial capital

Depending on who you ask, São Paulo is either what would happen if New York threw up on Los Angeles, or what would happen if Los Angeles threw up on New York. Either way, it’s big.

How big? If it were it’s own country, São Paulo would be the eighth largest in South America. From above, the city seems to sprawl out and up at once.

The other part of that analogy is money. São Paulo is not just the financial capital of Brazil, it’s also its primary center of commerce, fashion, food, music, industry and sport. As goods and services replace factories as the core of its economy, São Paulo is expected to leap from the tenth to sixth largest urban GDP in the world. Foreign businesses go there when they want to open shop in Brazil. Brazilian businesses go there when they want to project themselves on the national scale or abroad.

It should come as no surprise that São Paulo is by far the most mature startup scene in Brazil. Even entrepreneurs from rival cities will tell you that the majority of Brazil’s startups are concentrated in the city.

Transitive talent is one of the main advantages São Paulo has in that respect. Established tech companies like Google, Uber and Airbnb, to say nothing of established corporations in general, have their Brazilian headquarters in the city, and when employees get bored or inspiration strikes, they often leave to start companies of their own. By the same token, entrepreneurs looking to recruit experienced teams have no shortage of options from which to choose. The largest startups in the country, such as real estate startup VivaReal, which has raised approximately $75 million to date, are based in the city.

The companies themselves get involved, too, whether through patronizing events or providing a steady demand for B2B innovation. The largest and second largest private banks in the country have both set up entire divisions to interact with São Paulo’s thriving fintech subsector and it’s the main focus of Conexão Fintech, a initiative research and foster the Brazilian fintech ecosystem. Visa and IBM are major sponsors of Startup Farm, a leading accelerator with more than $100 million invested in upwards of 200 startups. Brands as varied as Embraco, a refrigeration technology and production company, and Natura, a cosmetics label, have created similar programs to invest in startups operating in their respective spaces. Impact-accelerators such as Artemisia and the nonprofit Endeavor play important roles in the ecosystem.

But the São Paolo startup culture also gets by just fine on its own. Together, co-working spaces like CUBO, plug.co and Impact Hub; accelerators like ACE, which has modeled itself as a growth-oriented version of Y Combinator; investment firms like Monashees, Kaszek Ventures, DGF, Redpoint eVentures, SP Ventures, Antera, 500 Startups, BBI Financial, and Bonanza Investments; and government-led initiatives like Innovatech, which provides online mentorship to around 300 startups, and SEBRAE, which focuses on small business more generally, form a well-rounded, autonomous ecosystem that maintains a surprising level of cohesion, in spite of the sheer size of the city. Organizers launched the inaugural CASE conference at a time when most of the national economy was in belt-tightening mode. This fall, they expect 8,000 entrepreneurs from 2,000 startups to attend.

Leaders in the São Paolo’s ecosystem include David Velez of NuBank, Brian Requarth of Viva Real, Fabricio Bloisi of Movile, Paulo Veras of 99 Taxis, Jorge Pacheco of Plug, Guilherme Junqueira of Gama Academy, Flavio Pripas of CUBO, Romero Rodriguez of Redpoint, Ana Fontes of RME, angel investor Silvia Valadares, Tony Celestino of UpGlobal, André Barrence of Google Campus, João Kepler of Bossa Nova Investments, Jose Prado of Conexao Fintech, Felipe Matos of Startup Farm, Carolina Morandini of Wayra and Michel Porcino from the São Paolo Mayor’s Office.

San Pedro Valley

It’s rare that you can trace the origins of a given startup scene with such precision, but the chosen moniker for Belo Horizonte gives it all away. Aside from the usual play on the northern California tech-mecca, “San Pedro Valley” draws its name from the São Pedro, the neighborhood that birthed many of Belo Horizonte’s first and most successful startups.

What set this core, pioneering group of entrepreneurs apart was not just their businesses but their commitment to giving back, in ways both concrete and abstract, to build a real ecosystem.

Principal among these efforts has been the Brazilian Startup Association, a unique entity started by Gustavo Caetano — the CEO of Samba Tech, the online video platform that recently added to its regional holdings with a new satellite location in Seattle, its second in the United States — and three other local leaders. Conceived as a facilitator of intra-entrepreneurial exchange and a lobby group advocating on behalf of forward-thinking startup policy in Brazil, the association has grown to include more than 4,000 member startups and 38,000 entrepreneurs throughout the country.

Other important community spaces include Hora Extra BH, a regular meetup, Coolwork, a coworking office and Aceleradora, an accelerator. Google has its national R&D office in the city, and in 2012, the city government inaugurated BH-tec, a digital park that caters to entrepreneurs in particular. Another government program, Minas Digital, an offshoot of the state Ministry of Technology, aims to have supported 100,000 local entrepreneurs by 2025. Toward that goal, it sponsored Belo Horizonte’s first StartupWeek last year, which featured more than 70 events across the city. Additional leaders in the city include Rodrigo Cartacho of Sympla, João Resende of Hotmart, Mateus Lana of SmarttBot and Roberta Vasconcellos of BeerOrCoffee.

Integral to the city’s startup culture is its large student population. With four top universities, including Minas Gerais Federal University, one of Brazil’s most dependable sources of IT talent, Belo Horizonte has the feel and energy of a college town, but the size and ceiling of a major urban hub. Lots of ambitious young people still leave for São Paulo, lured either by job or fundraising prospects. But in the near future, it’s easy to envision a reverse on the brain drain. Belo Horizonte is cheaper, friendlier and less inundated with traffic. Basically, it’s in many respects a nicer place to live, and plenty of businesses are finding it a prosperous place to put down roots, as well.

Rio de Janeiro and Florianópolis

As far as living conditions go, you won’t find a better place in Brazil, or anywhere else for that matter, than Rio de Janeiro. The stark, granite cliffs, lush jungle canopy and picturesque beaches get plenty of attention as is, but there’s still something to be said for having the option to brainstorm at a café overlooking the ocean or team-build during a hike into the mountains.

Regular events like FuckUp Nights, Geeks on Beer, Circuito Startup and Rio Info have learned to take advantage of the city’s stunning landscape and vibrant cultural offerings. The growing fintech scene in Rio got it’s own big event, Rio Fintech. A fairly comprehensive list of activities can be found on Startup Digest.

For better or for worse, the city’s transformation in recent years has been specifically directed toward creating a more attractive environment for a young, cosmopolitan professional class. Government programs to improve security, 4G connectivity and transportation have in turn encouraged major private investments in the tech sector. Cisco, in conjunction with local authorities, is devoting $500 million to a project that includes a venture capital fund and co-development facilities. Located in the heart of downtown revitalization, NEX has become the largest co-working space in all of Latin America.

In light of the city government’s emphasis on attracting foreign investment and tourism, it’s encouraging to see entrepreneurs use tech innovation — the area for which Rio’s startup scene is best known — to address lingering social issues. Founded in 2011 by Leonardo Eloi and others, Meu Rio (My Rio) is a digital civic engagement platform that sends alerts and facilitates a wide-ranging political discourse between diverse sectors of society. In a city where police violence has long led to distrust among the general population, the Igarape Institute has worked to develop “smart policing” mobile technologies to improve transparency. And, like a localized, family oriented Groupon, Clubinho de Ofertas offers mothers affordable shopping and activity options.

Cariocas, Rio’s largest startup group that counts several hundred members, hosts regular events and today is led by a group of entrepreneurs, including Danilo Neves de Martins and Ricardo Motta of Hostintown. Investors in the city include Acrux Capital, ArpexCapital and Valor Capital, which play an important role alongside organizations such as Startup Rio and FAPERJ. Additional leaders in Rio include Gabriel Gaspar of Nibo, Gustavo Mota of We Do Logos, José Prado of Conexao Fintech, Ricardo Barros of The Pareto Group, Bernard De Luna of 3Days and Rodrigo Salvador of Passei Direto.

But Rio isn’t the only beachside tourist hotspot at the forefront of the Brazilian startup scene. Florianópolis has made a big play to assert itself in the tech economy, and, in recent years, it’s payed off. According to the state government, 600 companies now contribute to a robust startup sector that has grown an average of 15 percent year-over-year to represent $350 million in annual GDP for the city.

Local leaders such as Eduardo Mattos of SmartMob Coworking and Eric Santos of Resultados Digitais play an important role in this growth. Earlier this year, 100 Open Startups named 10 companies from Florianópolis in its top-100 list, running the gamut from a solar energy startup (Soluz Energia) to a visual recognition software company (Meerkat) to an information platform for surfers (Opifex). Some people already put Florianópolis ahead of Rio in terms of ecosystem maturity. But if it’s not there already, then ongoing investments intended to consolidate a tech infrastructure that already includes two cyber parks — Alfa and Sapiens Parque — and the skeleton of an “innovation route” along one of the city’s major thoroughfares may soon push Florianópolis over the threshold.

Conclusion

The good news is that Brazilians have long since identified the issues that need to be addressed in order for the country to make the next step as a driver of innovation. According to the World Bank Group, it takes 83.6 days and 4.3 percent of income per capita simply to start a new business. Closing an old one can often be even harder. Labor laws don’t allow for the types of remuneration structures many startups like to rely on, and companies trying to maintain a lean workforce waste precious time and resources navigating the country’s antiquated tax code. None of this would strike anyone who has done even minimal business in Brazil as novel information.

The bad news is that there’s a reason the problems haven’t been fixed, despite universal recognition that they should be. In recent years especially, political infighting and communication breakdown has paralyzed the country, as documented by journalist Anna Heim. Whatever the arguments about the way that conflict was resolved, resolution at least holds the promise of action. President Michel Temer, controversial though he may be, has promised business-friendly reforms that could help unleash the immense latent potential of Brazil’s startup sector.

In the meantime, there are things Brazil’s entrepreneurs can be doing themselves. As in most Latin American countries, Brazilian startups are often little more than mirror copies of models proven elsewhere. That’s fine for doing business on the national level, but if Brazilian startup culture is to project itself beyond its own borders, it needs to follow the example set by the many local entrepreneurs who have contributed genuinely new ideas to the marketplace. The number of business doing just that has ratcheted up with each passing year, and as the country as a whole starts to turn the corner on an economic slump, it’s only a matter of time before Forbes and company are once again writing features on the booming Brazilian startup scene.

Written by Conrad Egusa (@ConradEgusa) and David Carter (@DaDaveyCarter) on TechCrunch. Updated by José Prado (@jose_prado)