It’s nearly 3pm on a rather cloudy Thursday afternoon here in Philadelphia. I’m in John Huntsman hall, the imposing brick and glass edifice which forms the physical and spiritual core of the Wharton community, and it feels eerily deserted. Why? In keeping with tradition, the vast majority of my MBA peers have taken a few days off, swapping the dreary, snowless streets of Philly for the powdery slopes of Breckenridge, Colorado. While my friends tear up the pow pow over in ski country, I’m lying low here on the east coast… great way to save some dinero and escape the MBA masses for a bit. Also, the perfect opportunity to reinvigorate my blog with a brand new post! Today, I’ll be discussing what I believe to be some of the key impediments to the growth of the venture capital / startup ecosystem in Brazil.
The Global Proliferation of Startup Ecosystems
Before diving into the meat of my analysis, it’s worth taking a look at the global ranking of startup ecosystems conducted by The Startup Genome Project. They’ve done an excellent job of breaking down what defines an ecosystem, the factors that condition their strength or weakness, and the variables that mediate their growth prospects. The report also describes the rapid emergence of dynamic new ecosystems across the world, stating that:
“While nearly all high growth technology startups have historically emerged from no more than 3-4 startup ecosystems, namely
Silicon Valley and Boston, this trend appears to have reached its end. Simultaneous with a global explosion of entrepreneurship
has been an explosion in the rise of new startup ecosystems around the world, and a new found maturity in others.“
I love this quote because I believe it captures the essence of a fundamental shift in how we conceptualize venture formation and venture investing globally. Silicon Valley will always remain a juggernaut in the world of startups / venture, but truly prescient entrepreneurs and investors are beginning to look outside the Palo Alto bubble for unique and compelling opportunities that present the possibility of truly outstanding returns. I believe São Paulo (which is currently 13th in the global ranking) is on its way towards becoming a powerhouse ecosystem. But in order to genuinely achieve a world-leading position as a catalyst for innovation and company creation, a few things need to happen. And that is what this post is about.
Exits, or “Can I get an Instagram Please”
We haven’t seen too many big exits in Brazil. Exits – whether through IPO, financial sponsor purchase, or strategic acquisition – are the lifeblood of an ecosystem; they are the combustible that fuels the fire of the industry. Exits generate the financial returns that LPs and GPs seek, and (in most cases) they represent the ultimate realization a founder’s entrepreneurial dream. Perhaps most importantly, exits provide the economic justification for the existence of venture capital and the startups capitalized by it.
While a few prominent exits mark the history of the Brazilian VC / startup world – such as the 2009 purchase of Buscapé by Naspers for USD $342M – such success stories are few and far between. Brazil needs more and larger exits to demonstrate to the global VC community that it can deliver VC-like returns, and to prove to domestically-inclined funds that venturing beyond US borders can yield positive, black swan-style outcomes.
Imagine the impact of an Instragram-esque exit in Brazil? There’s something about a 312x return that gets people fired up… An exit of that magnitude would attract additional capital and talent, inspire new generations of young people to build companies, and generally grow and enhance the ecosystem. Can Brazil deliver a mega-exit? While I don’t see anything on the horizon, I’m long-term optimistic (for reasons that I’ll go into in another post).
More acquisitive Strategics
We need Brazilian companies to become more acquisitive. This point is closely linked to my commentary above regarding the importance of exits. One of the great things about the San Francisco ecosystem is its abundance of big, cash-rich tech companies who buy startups as a means of catalyzing innovation, obtaining top talent, and acquiring new technologies. Intel, Google, Apple, Cisco, IBM, Oracle, Microsoft, Amazon…. The list goes on and on.
While it’s unlikely that Brazil will ever come to possess such a powerful panoply of acquisitive tech titans, I do believe that some of Brazil’s existing tech / media companies will become more positively disposed towards startups in the future. Ecommerce companies like Nova Pontocom and B2W could snap up smaller, vertical-specific ecommerce startups in an effort to gain a strong foothold in a particular product segment. Media conglomerates like Abril already recognize the importance of digital media, and may use startup acquisitions as a means of accelerating their transition to a digital world. Finally, it’s quite possible (in fact, likely) that cross-border startup acquisitions will pave the way for established US companies to enter foreign markets. Could Zappos (Amazon) buy Dafiti? It’s not beyond the realm of possibility…
The Halo Effect
Check out my snazzy powerpoint graphic below. Can you see the positive feedback loop, the self-reinforcing cycle? I like to call this “The Halo Effect,” a not-so-subtle reference to the fact that – in Silicon Valley –successful entrepreneurs become highly active angels, seeding future ventures and thereby creating a virtuous circle forged of capital and mentorship. This is another reason why Silicon Valley really is the “fertile crescent” of the startup world, why it’s given birth to so many outstanding, world-changing companies. Accomplished entrepreneurs in Silicon Valley give back in the form of money and expertise, and this tradition of “closing the loop” has helped create an explosion of ongoing innovation and company creation that shows no signs of abating. It’s a cycle that feeds on itself and grows stronger over time. Awesome!
We need this in Brazil. We need more successful entrepreneurs to redeploy the proceeds of their exits into new ventures and new entrepreneurs. You see some examples of this – Hernan Kazeh and Nicolas Szekasy (Mercado Libre), Romero Rodrigues (Buscapé), Florian Otto and Felix Scheuffelen (Groupon Brazil), Kai Schoppen (BrandsClub) – but not nearly enough (and too few of these guys are actually Brazilian!). My hope is that the positive feedback loop that has helped created such a rich entrepreneurial ecosystem in Silicon Valley will begin to take hold in Brazil. I think it will – it’s just a matter of time (and more exits!!!).
That’s it from me for now. As always, I welcome your comments and feedback, and I encourage you to check back often. Até mais!!