Understand why Brazil has become a hub for startup growth

A study conducted by the American consultancy McKinsey & Company and exhibited during the first presentation of the Brazil at Silicon Valley event earlier this month outlined an overview of the development of Brazil's technology market. The report, which was made before the pandemic and does not consider the effects of coronavirus, shows why Brazil has become one of the main centers of innovation and a strong candidate to house more billion-dollar startups in the coming years.
With data obtained from a quantitative survey of more than 400 startups and interviews with more than 50 entrepreneurs, investors and professionals working with market regulation between November 2019 and February of this year, the consultancy was able to indicate how foreign investments in Brazilian companies have grown at an exponential pace in recent years. If the figures are still far from those recorded in the United States and China, they already show that Brazil can be as competitive as Israel, considered one of the main technology markets on the planet.
With more startups with market values that exceed eight digits and, therefore, can be considered unicorns, Brazil has surpassed Israel in the number of technology companies that are already worth more than 1 billion dollars. Around here, 13 companies have become unicorns by 2019. They are: 99, Arco, Ascenty, Ebanx, Gympass, iFood, Loft, Loggi, Nubank, PagSeguro, QuintoAndar, Stone and WildLife. There are 8 in Israel and 12 in Germany. Ahead of Brazil are countries such as India (23), the United Kingdom (24) and China (100), in addition to the United States with more than 200 billion-dollar startups.
As the study shows, Brazilian startups are becoming billions in a shorter period of time. The first Brazilian unicorn, PagSeguro won the label in 2016 after 12 years of operation. Stone, Gympass, 99, QuintoAndar and Ebanx took less than seven years to get it. Loft, which operates in the real estate market with the renovation and sale of real estate, needed only 8 months to reach the private valuation of 1 billion dollars, won in 2018.
Part of this success is due to a decrease in the time it takes these companies to have 1 million customers in their business. While Nubank has needed 40 months to consolidate in the market since it was launched in 2014, rival C6 Bank, created in 2019, needed only a semester to surpass the brand. Other players also surpassed Neon, which is already worth more than 10 billion dollars, in this race. The Neon bank took exactly two years, 24 months. Next, 23 months. Inter bank needed 34 months and Banco Original reached the mark in 38 months.
The success of these operations was only possible thanks to the flood of money that was contributed by the companies as a way to scale their operations. One of the largest investors is Japanese bank Softbank, which has set up a $5 billion fund to invest in promising Latin American businesses. In an interview with EXAME in 2019, Masayoshi Son, who heads the company and has invested more than $100 billion in giants such as Alibaba, Uber, WeWork, among others, said the region represented "a great opportunity to partner with talented entrepreneurs in markets historically lacking capital and ambition."
But it is to be considered that the patience of investors like Masayoshi Son with loss-making startups may be coming to an end. According to a report published in the latest issue of exame magazine and what studies indicate, the end of the spree of moneyed companies, but that do not present a business plan that can stand up will not be a trend to be followed in the next decade. Recent cases of companies like Uber and WeWork have shown investors that a revolutionary idea is not enough, entrepreneurs need to keep in mind how they will do so that that idea is ultimately profitable.
In Brazil, as the McKinsey report shows, there has been a considerable increase in the value and amount of contributions to technology companies over the last decade. By 2012, only US$60 million had been invested in Brazilian startups by these investment funds. The figure multiplied by 10 in the years to 2017. In 2018 venture capital investments already represented US$1.5 billion or 0.07% of Brazil's GDP. The following year, $2.4 billion and 0.12% of GDP.
The value of 2.4 billion dollars, however, still represents only 1.87% of the venture capital investment that U.S. startups received until 2019. The U.S. figure of $128.3 billion is also overwhelmingly higher than that recorded in Israel, with $3.9 billion and nearly three times higher than china's recorded 46.4 billion dollars. In relation to the percentage of GDP, the American value is equivalent to 0.6%. It is higher than China's 0.33% percentage and lower than Israel's 0.99%.
Of the investment that arrived in Brazil in recent years, about 40% was destined for fintechs. Financial startups received $935 million in 62 funding rounds. Real estate and human resources companies raised around $350 million, while mobility companies such as passenger transport received $279 million. Healthtechs, which are now in the sights of investors due to the new coronavirus crisis, received only $43 million in 24 deals.
The scenario is also promising for those who are starting to set up a business. According to the study, 54% of Brazilian startups are initially founded thanks to investments made by the founder himself or by contributions made by family or friends. Between 2010 and 2019, angel investment in startups increased 2,700%, from $4 million to $112 million. The figure already represents almost half of the figure received in Israel: 271 million dollars. But it is still 86 times less than the amount applied to companies in the United States: 9.6 billion dollars.
In addition to the investments of angels and venture capital firms, Brazil also saw first startups debut on the U.S. stock exchanges. This is the case of Stone, Arco, PagSeguro and XP, who performed their IPOs in 2018 and 2019. At the time of publication of this report and with the exception of Arco, all were traded shares below the initial value recorded in their ipos. The drop, however, takes into account a global depreciation of the market due to the economic impacts generated by the pandemic of the new coronavirus.
In the case of Arco, which operates with education, the shares ended the trading session on Monday (12) traded at 54 dollars each, 136% higher than that recorded at the end of the IPO made in October 2018. The company's shares are traded on Nasdaq and the company is already valued at $2.97 billion. With the covid-19 crisis, the stock fell $37.46 for each asset last April 3, but then recovered.
If it hasn't affected Arco's business so much, coronavirus promises to be a major blow to the market as a whole. According to a study conducted by Liga Ventures with 234 founders and directors of startups more than half of the companies witnessed a drop of more than 50% in revenue due to the impacts of the pandemic on business. A recent estimate produced by Crunchbase points out that 2020 is expected to be a year of falling venture capital investment in technology companies. In 2019 the sector moved US$294.8 billion.
Brazil may be becoming the country of startups, but there is still a long journey until this is, in fact, a global technological hub that can compete head-on against powers such as the United States and China. Even with the growth of startups, little has changed when the subject revolves around the largest Brazilian companies. The latest economic crises and political instability and strong currency devaluation may have delayed the development of the national economy.
In 2010, the market value of the 10 largest Brazilian publicly traded companies totaled US$884 billion. The figure fell to $242 billion in 2015 and ended the decade at $592 billion. There are no technology companies on any of the lists. There was also little change in the rankings of the most valuable companies in the country between 2010 and 2019. Petrobras, Vale, Itaú, Ambev and Bradesco remained in the lead, with only a few changes of positions between them. Petrobras continues in first place, even with a market value drop of 228 billion to 101 billion dollars.
For comparison, China's top ten publicly traded companies had a market value totaling $2.6 trillion in 2019, double that recorded in 2010. The scenario is more bleak when compared to Brazil is placed next to the United States. There, the figure went from $1.8 trillion in 2010 to $7 trillion. The evolution of the American market value was the growth and consolidation of business of technology companies. At the end of last year, Apple, Microsoft, Alphabet, Amazon and Facebook dominated the top positions on the list. In 2010, the top 5 featured companies such as ExxonMobil, Berkshire Hathaway and General Electric.
Brazil has also failed to place even one technology company among the ten most valuable in the domestic market, even with high valuations of companies such as XP, which ended the year valued at US$21.3 billion. "For Brazil to evolve in the new era, Brazilian technology companies and startups need to thrive," said Nicola Callichio, a McKinsey board member. The market value of Brazil's 10 largest technology companies tripled between 2010 and 2019, from $27 billion to $86 billion. There's hope.