The Rise of the Unsexy: B2B in Brazil

I’m back at the Startup Mansion here in Sao Paulo today (correction: I was at the Mansion when I began writing this post; now I’m back at the Wharton School in Philadelphia). As you can see, the “Luigi” mural that is being painted in the main work area is nearing completion… pretty cool, pretty edgy. I wonder if the guy who is painting the mural is being compensated in equity by one of the startups here. Reminds me of the guy who made a fortune after taking equity in exchange for designing and painting the murals at FB headquarters…

luigi mural

This week has been insane – since I broke the news about Rocket Internet gearing up for an IPO this past Saturday, I’ve been flooded with inquiries about the implications of the potential event. I’ve also been busy meeting with lots interesting entrepreneurs, VCs, and eCommerce professionals who are actively shaping the future of the Brazilian startup ecosystem – and the Brazilian economy more broadly. Absolutely fascinating. I love this stuff!

I promised in my very first post to address the topic of B2B in Brazil. So here we go. I begin with an analysis of the macroeconomic dynamics that led VCs to heavily “overweight” B2C businesses in their portfolios. I then discuss the major driver of the shift in attention towards B2B (and away from B2C). Finally, I identify four B2B startups that I would personally invest in.

The underpinnings of the B2C frenzy

Let’s begin with a quick overview of how trends in VC investing in Brazil have evolved over the past year two years. I discuss this in a prior analysis, but it’s worth touching upon once more in the context of this post. Back in 2011, B2C businesses were all the rage, with investors clamoring to get into a number of sexy, consumer-facing deals. Peixe Urbano,, Olook, Shoes4you, Oppa, Belezanaweb, Petlove, Elo7, Hotel Urbano… All of these B2C startups raised capital – usually at very favorable valuations – from top-flight US and Brazilian investors including Tiger Global, Redpoint, Accel, Kaszek, and Monashees, among others. Check out the comprehensive list of who got funded by whom here.

At the time, investing in consumer-facing companies made lots of sense. Brazilian GDP growth was on fire, posting a 7.5% increase in 2010. This growth was in large part consumer-driven: the government pushed banks to expand consumer credit, making it easier for lower income consumers to finance purchases of cars, domestic appliances, and other consumer goods. Equally as important were government programs designed to usher previously marginalized segments of society into the consumer economy. Programs like Bolsa Familia and Minha Casa, Minha Vida helped push millions above the poverty line. More specifically, between 2005 and 2011, a staggering 40.3M Brazilians rose from classes D and E (comprised of those individuals below the poverty line, with little-to-no consumptive power) to class C (middle class). In 2011, for the first time in Brazilian history, the middle class represented the majority of the population (54%). This sea-change in the socioeconomic composition of Brazilian society resulted in a dramatic increase in consumption across the economy, making consumer-facing startups look like worthy bets for VCs.

And bet they did. As described above, VCs piled into investments that tapped into the theme of “the rise of the Brazilian middle class.” I would argue that VCs became overlevered to this theme, and that – like any rational investor – they are now looking to diversify away some risk by moving away from B2C.

To be clear, it’s not that the Brazilian consumer today is struggling – far from it. The Class C consumer group in particular remains an important driver of Brazil’s economic growth. But just like an overeager child who eats too much ice cream too quickly, too much consumer exposure across the portfolio can give a VC a real headache (especially when a consumer-play goes sour). Hence the rise of B2B, both as a diversification tool, and as a smart way to tap into big, hugely inefficient markets where few others are playing.

Disrupting the dark pools

The need to move away from plain-vanilla consumer plays and into businesses that tap existing but as-of-yet undisrupted markets is one of the biggest drivers of VC’s rising interest in B2B business models in Brazil.

“Dark pools.” You usually hear this term in financial circles, where it is used to describe trading networks that are opaque, obscure, and hidden from the public eye. But the term is also well-suited to describe a market phenomenon found within the world of startups. In startup land, “dark pools” are markets that are large, unsexy, obscure, and poorly understood. Markets that represent massive business opportunities, but that most people don’t bother to look at; markets that remain antiquated and undisrupted long after the low-hanging fruit within the B2C space has been picked; markets that won’t attract the likes of Rocket Internet. Dark pool markets can most often be found within the B2B arena, because this is the domain of the non-obvious.

Identifying these dark pools of unexploited market opportunity requires a willingness to think outside the box about difficult problems faced by everyday businesses (not consumers). These opportunities are by definition less well understood and less obvious. It’s easy and natural to come up with B2C ideas, because as buyers of everyday goods and services, we intimately understand consumer problems and can thus more easily conceive of the B2C business ideas that would solve them. The B2B opportunities often escape us because they exist behind the scenes, at a level removed from our day-to-day consumptive activities. But they do exist. In fact, they are plentiful. And those savvy enough to identify and exploit them will reap big rewards down the line.

Four Brazilian B2B startups that I would invest in

The best way for me to paint a compelling panorama of this hidden landscape is to talk about some of the startups who are disrupting dark pool B2B markets in Brazil at this very moment. I have met and engaged with the founders of each of these companies, and I would personally bet money on all of them. Why? Because the Founders have (1) Vision (they have charted a path to the creation of something massive); (2) Magnetism (they have the charisma, poise, and presence to attract top talent and intelligent capital); (3) and Drive (they possess an unrelenting, irrepressible determination to achieve success no matter what). The icing on the cake when it comes to each of these companies is that they’ve made the wise choice of focusing on dark pool markets that are large, ripe for tech-driven disruption, and unlikely to attract the attention of predators like Rocket Internet.

So which companies would I invest in? You’ll have to check back on Tuesday to find out :-)

Até a próxima gente!

Footnote: The “Vision, Magnetism, Drive” framework for identifying investment-worthy founding teams is an adaptation of a framework I learned about in Professor David Bell’s class on Digital Commerce at Wharton. Professor Bell in turn learned about the framework from Kirsten Green, Managing Partner at Forerunner Ventures, who uses it to help evaluate investment opportunities at her fund.


  1. Joof

    Great article Thomas… I have been reading your blogs. Keep up the great work. I am also curious if you have done any research on coffee beverage markets, especially in Africa ? I know you worked with the leadership development in South Africa. It will be interesting to discuss that. I was recently reading an article on this at the BBC website.

  2. Pablo PG

    Hey Tom, great article. I fully agree that shining light on those dark pools could surface great business opportunities. I especially like the Vision, Magnetism, Drive framework. However, I think I would add that to succeed with these dark pools a founder would require having some expert knowledge on the B2B market addressed. As you said, B2C has relatively low barriers of entry, as we are all consumers; this market knowledge does not happen in a B2B scenario, so any inside information (due to past work experience in the industry, for example) would be also essential.
    Keen to hear your views on the four up and coming B2B businesses.

  3. Pingback: Four Brazilian B2B Startups I would Invest in « Tropical Considerations

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