The Current State of VC in Brazil

By Thomas Baldwin (WG’13/G’13)

It’s midnight as I write this on my buddy Wolf’s couch here in São Paulo. Despite a long and exhausting day full of meetings, I’m restless, antsy, agitated… not even close to tired. This city has that effect on me. I’ve talked about this before, but the energy here is electric, the city is raw and real, humanity unleashed. I love that amidst the chaos of this city, more and more entrepreneurs are creatively addressing serious problems to create meaningful social (and economic) value. Oh, and lest I forget, I should also mention that people here are consuming. A lot. Walking through the mall these days makes you feel like a sardine. They’re packed.

Brazilians love to shop. Both offline and online.

But I digress. In this post, I want to discuss a topic that is of relevance to anyone looking to raise capital down here. Over the past few days I’ve met with a number of startup founders in Sao Paulo. Many of them are singing a common refrain about how the ecosystem – particularly with respect to VC funding – has changed over the course of the past year and a half. I thought I’d write a quick post to share what I’ve learned, and offer a few thoughts of my own.

Allow me to provide some context. I traveled to São Paulo in the summer of 2011 as part of the Lauder Program’s summer immersion session.  I was a bright-eyed MBA looking to absorb as much information as possible about the exciting world of Brazilian startups. I had a blast and learned a lot.

Boy, those were heady times. In the summer of 2011 – a year and a half ago – lots of people were raising capital. A lot of freshly minted MBAs came down, and many of them raised sizable rounds relatively easily, on very generous terms, with great valuations, without having to demonstrate much in the way of traction or revenues, without having a minimum viable product. In some cases, the ease with which these entrepreneurs raised was warranted by truly phenomenal ideas and / or excellent entrepreneurial track records. Davis (WG’11/G’11) and Kimball are an example of this with And they continue to crush it.

In other instances, however, the money may have come too easily. Some entrepreneurs probably shouldn’t have gotten as much money they did. Peixe Urbano, for example, is struggling mightily right now, and their investors are worried.  Like I said, these were heady times, and I think a lot of VCs got caught up in the hype, felt like they were going to get left out of supposedly hot deals, may have shirked a bit on diligence, and as a result may have made some hasty decisions. It’s obviously easy to say this in retrospect, so I’m not criticizing anyone. All I’m saying is that TIMES HAVE CHANGED.

Fast forward to the present. Today we exist in a venture environment much different from the one I described above. Pre-product capital raises are few and far between. Investors want to see traction, they want to see an MVP. They are pushing back on valuations. In general, it’s harder to raise capital right now.

Why has this happened? A couple reasons:

(1)    As I alluded to above, not all the investments that VCs made in 2011 are performing well. Home-grown Brazilian VC is relatively new, and when things heated up, I believe certain VCs made some mistakes (yes, VC is a hit-driven business, we expect lots of companies to fail even in a successful portfolio, but I’m saying that some avoidable mistakes were likely made). So the Brazilian VCs are learning, they are becoming more sophisticated, they are no longer as impressed by a flashy deck and great salesmanship as they were before. They are becoming more astute in their assessment of business models, of what is likely to work and what will likely fail.

(2)    The Brazilian “sexiness” factor, and a few high-profile capital raises by MBA-types, resulted in a huge influx of ambitious aspiring entrepreneurs from abroad. On the home front, more home-grown talent began to view entrepreneurship as a viable career path. You also have successful Brazilians returning home from abroad to launch businesses here. Bottom line: the space has gotten MUCH more crowded. VCs here used to have to search pretty hard to find entrepreneurs, now the entrepreneurs come to them in droves. It’s tougher to get their attention, and quality expectations are higher.

(3)    Diversification. Brazilian VCs are over-indexed to certain segments, particularly eCommerce. They put a lot of cash into eCommerce startups in 2011, and as a result they are shifting focus to other areas, like healthcare, financial tech, and education. A lot of the entrepreneurs on the ground are still pushing eCommerce ideas, which has resulted in lots of folks getting turned away. The eCommerce spigot seems to have closed (unless of course you’re doing B2B eCommerce, which I think is an entirely different story, and which I’ll cover in a separate post).

(4)    Some (but not all) of the US venture firms that are investing in Brazil have “placed their bets” on Brazil and are holding tight for a while until they see how things play out with existing investments. They are excited about Brazil, but they don’t want to over-expose themselves, so having put money into a few companies here, they may be pulling back for the time being. Unless they find something incredibly compelling, of course.

What does all of this mean for entrepreneurs looking to build big, capital-intensive businesses in Brazil? Think carefully about the factors I’ve written about above, and act accordingly. In the current environment, you need more than a beautiful deck, a magnetic personality, and a compelling vision. You need to show traction, you need to demonstrate some results (ideally revenues), you need to show you’ve got a sustainable competitive advantage. If you’re bent on B2C eCommerce, recognize you might have a tough road ahead of you (I’m not saying it’s impossible, just that you’re swimming upstream). If you’re looking to raise from Brazilian VCs, don’t pitch them on an idea that taps a theme they’re already invested in (don’t go to Monashees with anything Baby related, for example).

Most important (and most basic of all), do your homework! Unfortunately (or fortunately?) there are a lot of people down here who are pitching crappy ideas, who haven’t done a solid market-sizing, who don’t understand how local dynamics impact imported models, etc. Use this to your favor and differentiate yourself by getting genius-level smart on your chosen idea & market before you step inside the shark tank!

Até a próxima gente!

This article was originally posted on 12/20/2012 on Tom’s blog Tropical Considerations: Insights on the Brazilian VC/Startup Ecosystem.


My name is Tom Baldwin. I’m a veteran Brazilianist with a passion for startups and entrepreneurship. I’ve spent a little over a year living and working in Brazil at different points in time. I’m a dual citizen of Mexico and the US. I’m a student at Wharton / Lauder.  My blog, Tropical Considerations, chronicles a 5 week adventure in São Paulo that began in December of 2012. I’m here to build relationships, explore opportunities, and work on a few ideas of my own. Find me on linkedin and twitter.