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Corporate venture growth in Brazil is another sign of a mature tech ecosystem

ICE Graveyard 28/07/2016 Anderson Thees

Despite recent positive news and a renewed interest of international investors in the country, with some even forecasting an approaching “tsumoney,” the crude reality is that Brazil is suffering. The country has endured a profound financial crisis for the last several years. The path to an economic turnaround has been delayed by a massive political crisis, aggravated by the unearthing of multiple corruption cases perpetrated during Brazil’s booming years.

As the mess untangles and we go up from what many experts consider the bottom, the consequences for the region’s overall economy are now very real. It’ll likely be a long way up. Yet, for investors, it’s a lifetime opportunity.

The harsh macro-economic conditions are a test for the build-out of Brazil’s startup ecosystem during the last 10-15 years. A silver lining and bright spot for Brazil is the tech sector, as confirmed in a recent report from LAVCA. “Fear is the path to the dark side,” but Brazil’s entrepreneurs have stayed confident and continued to found and grow viable, innovative companies, irrespective of the economy-at-large.

To some extent, the financial crisis even creates interesting conditions for entrepreneurs, like an overall lower cost to build a business, higher availability of top talent and very real incentives for end users and companies to seek the efficiencies that technology startups typically unleash.

Despite recent volatility, the country’s political crisis has an end in sight. Brazil has a vibrant democracy, a growing middle class and its $1.53 trillion GDP ranks as the ninth largest global economy. While more than 100 million people in Brazil are already online today, there are nearly another 100 million more to go, indicating sustained growth in years to come. There’s now a universe full of opportunities for startups in Brazil, with the accelerating adoption of smartphones as the primary device to access the internet.

Tech ecosystem maturity in Brazil

If you step back to analyze what’s happened to the tech ecosystem in Brazil, there’s been a remarkable evolution. While it’s pushing it to say the macro-economic crisis in Brazil has been a positive, it’s had a sobering effect and brought the region to a higher level of maturity much faster.

The average quality of Brazilian entrepreneurs has risen dramatically. Startups have tackled more profound problems, with more creativity and innovation, instead of merely trying to work from and recreate “copy and paste” business models. Brazil’s tech ecosystem has grown inspired by the way Silicon Valley works, instead of just copying what the Valley has done in the past.

New corporate venture funding has begun to blossom fast in Brazil.

One characteristic of a thriving ecosystem — and a killer characteristic in Silicon Valley — is the symbiotic relationships between corporations and startups. I’m not only talking about M&As. The symbioses go far beyond that. For example, an expanding willingness and readiness of large companies to buy products and services from smaller, nimble startups.

Other momentum-building relationships and transactions include: licensing and distribution agreements, “acqui-hires” and IP-driven acquisitions. They bring dynamic, vibrant and shorter cycles to the ecosystem. All this is common practice in Silicon Valley, but it was unheard of in new ecosystems, or at least it was in Brazil — until recently.

A recurring explanation as to why this is commonplace in Silicon Valley and not elsewhere is “startup DNA” within global giants founded in garages. As former startups that were venture-backed with accelerated growth cycles, they’ve been there and they get it. By that token, a nascent tech ecosystem in a less mature market would have to wait for organic loops for this to repeat. The same pattern is underway in Brazil with companies like Buscape, MercadoLivre, Movile and TOTVS. They’re all VC-backed companies that grew big and now play important roles in the Latin American market.

Corporate venture trend is fast-tracking market evolution

The fast-growing global trend of corporate venture is fast-tracking new symbioses. Large corporations’ strategic decisions to invest in the innovation ecosystem in an organized way have built up significantly during the last five years. There are already more than 1,500 corporate venture units globally, and investment is accelerating in total number and dollar amount of the deals, according to James Mawson, chief editor of Global Corporate Venturing. That is irrespective of “startup DNA,” even for century-old family owned businesses. And it’s happening globally, from Silicon Valley and Detroit in the U.S., to China and Switzerland and, more recently, within Brazil and across Latin America.

Corporate venture in Brazil was sparked by international corporations with lengthy experience in the field. They used it as a mechanism to enter, learn and help develop the region’s ecosystem while earning proper financial returns.

In 2012, when Redpoint raised its first fund for Brazil, four international corporations joined with similar ambitions. In addition to investing as a limited partner, Cisco launched an innovation center in Rio, with a very interesting, ambitious long-term plan for the region. Other active corporate venture players in Brazil include Intel, Naspers and Qualcomm. The foundation’s been laid, and the trend is now accelerating.

VC firms have a vested interest in ecosystem evolution, and in working closely with corporations that invest in funds.

More recently, there’s been a potentially groundbreaking trend in which large corporations in Brazil without a startup heritage have started to pursue not only corporate venture strategies, but broader relationships with the startups.

This trend can help fast-track and save a few cycles in the Brazilian ecosystem. It helps global giants better gel with and interact within the regional ecosystem. They no longer only invest in the venture funds or directly in startups. They also learn, teach, buy products and services, collaborate on research, “acqui-hire” and jointly distribute new, innovative products — which is all well-aligned with the needs of a nascent ecosystem like Brazil’s.

New corporate venturing is blossoming in Brazil

VC firms have a vested interest in ecosystem evolution, and in working closely with corporations that invest in funds. In September, we helped co-launch an innovative co-working space called Cubo in partnership with Itau, the largest private financial institution in Latin America. Cubo is a major milestone for startups and large corporations to develop deeper and far-reaching relationships in Brazil. Since its launch, more than 100 large companies have approached us and Cubo’s leadership team to discuss how to better engage with the technology startup ecosystem in Brazil.

New corporate venture funding has begun to blossom fast in Brazil. For example, Embraer, the airplane manufacturer, invested in a corporate fund focused on avionics and related technology. Porto Seguro, a regional insurance company, recently launched an accelerator, its first fund, Porto Growth Edge 1 and a new investment arm called Porto Seguro Capital. At the end of June, Naspers led a $40 million Series F round for Brazil-based mobile commerce platform Movile through its corporate venturing unit, Naspers Ventures.

The same week, Qualcomm announced it is funding a new program to achieve the vision of a drone on every farm in Brazil through its Qualcomm Wireless Reach initiative. Monsanto and Microsoft recently committed to invest $92 million in agtech startups. Of course, agriculture is a significant part of Brazil’s economy, as the country is a world-leading producer and exporter of many crops.

Last October, Brazil hosted its first corporate venturing event to help showcase the government recognizes the importance of the corporate venture trend and is committed to support the process. Led and organized by Jayme Queiroz, investment officer at Apex-Brasil, the event will repeat this year in October.

While still early, we believe the rise of corporate venturing in Brazil will be an important catalyst for the innovation ecosystem. The symbioses between large corporations and startups is very valuable, and not having to wait for as many cycles as earlier markets did would be a bliss.

More corporate venture involvement with Brazil’s ecosystem and entrepreneurs will propel and better prepare and position the entrepreneurs and investors to take advantage of an upswing, whether in smaller waves or a “tsumoney.”

Disclosure: Thees was previously an investor in Buscape and Movile while serving as LatAm Investment Principal for Naspers. Porto Seguro is part of Itau, a Cubo co-founder alongside Redpoint eventures. Cisco is an investor in the Redpoint eventures fund and a sponsor of Cubo.

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