Brazil's Bet on Foreign Entrepreneurs
WHY YOU SHOULD CARE
Because the struggle to make South America the new hot spot for entrepreneurship is on. And it’s a race against bureaucracy.
By Wesley Tomaselli
Believe it or not, the Silicon Valley isn’t the only force of gravity in the tech startup world that’s sucking up talent. A ways south of the Rio Grande, some of Latin America’s biggest cities are starting to buzz with the same entrepreneurial fervor that the Bay Area is famous for. According to LAVCA — a group that tracks private investment across Latin America — private equity groups and venture capital firms invested $8.9 billion in Latin America in 2013, marking a $1 billion increase since 2012.
Since the early 2000s, Brazil’s economy had been riding a growing economic wave, thanks largely to reforms led by its former Socialist president, Luiz Inácio ”Lula” da Silva. When Lula left office, Brazil’s economy was growing at a rate of 7.5 percent.
But in recent years, both Brazil’s leading politicians and business people have faced rough waters. President Dilma Rousseff has faced protests over corruption, continuing crime and a dragging economy. In 2013, the economy’s growth rate slowed to 2.3%. The country’s wealthiest man and most famous entrepreneur, Eike Batista, effectively declared bankruptcy last year. Hosting the World Cup this year looks more like a disaster waiting to happen than the celebration of a strong economy.
Could building on Brazil’s budding tech startup scene lift the nation back to the upper echelons?
Entrepreneur Jake Marmulstein is 24 years old, and next month, if all goes smoothly, he’ll be taking a plane from New York and landing in Rio de Janeiro, work visa in hand, ready to dig into the new startup scene. He’s already been around the block in Brazil, and he’s seen fellow entrepreneurs flail in one of Rio’s startup accelerators, succeed in gaining seed funding and fall back to Earth after getting lost in Brazil’s bureaucratic labyrinth.
Until recently, entrepreneurship in Brazil has been associated with failure.
The reason Marmulstein didn’t choose Silicon Valley? He thinks Brazil is ripe for participating in the construction of a budding and promising tech startup ecosystem. Already, Brazil has established a wave of startup incubators — places where entrepreneurs with big ideas and lots of energy can co-work, connect with mentors’ advice and pitch their ideas to investor panels.
Marcelo Sales and Benjamin White founded Rio de Janeiro’s 21212 Digital Accelerator in 2011. They bring in 10 entrepreneur teams for four-month stints and pay them $22K to seed their digital companies. It’s a scene where foreigners and Brazilians mix.
“Rio is becoming more friendly to startups as more people get excited about technology and technologists,” says Marmulstein. “Until recently, entrepreneurship in Brazil has been associated with failure. It’s only now that people are beginning to think it is socially acceptable and cool to be part of a startup.”
Brazil’s middle-class market is ready for what startups have to offer, and the venture capital to get them going isn’t far behind. Boston Consulting Group says that Brazil’s middle class could likely grow into a $1.6 trillion behemoth of a market by 2020. Entrepreneurs like Marmulstein want to dig in.
We’re talking about a lightning-speed landscape here. It took Silicon Valley 80 years. There [in Latin America], it’ll take 10 or 15 years.
— Mike Hennessey, Latin American investor and mentor
But startup life isn’t just getting more hip in Brazil. The entire region has emerged in the last decade with a handful of success stories, something Latin American investor and mentor Mike Hennessey says is crucial for a healthy ecosystem. He believes Brazil’s Rio and São Paulo hubs are just a couple in a wave of strong ecosystems that is starting to flourish across the continent.
“Success begets success. There has to be another billion-dollar exit … but we’re talking about a lightning-speed landscape here. It took Silicon Valley 80 years. There [in Latin America], it’ll take 10 or 15 years,” says Hennessey.
Brazil has already turned out some success. São Paulo-based baby product e-commerce website Baby took Brazil’s rising middle class head-on and raised $4.4 million in their first round of venture capital funding in 2011. One year later, founder Davis Smith and his partner went on to raise $18.2 million more in their second round of funding.
“The baby products market is a huge market and it’s largely untapped,” says Smith, who estimates that Brazilians spend roughly $70 billion a year on baby products. “We’re definitely tapping just a sliver though … the market is in its infancy.”
But the region as a whole boasts some sharp exits, too. MercadoLibre, an Argentina-based e-commerce site, was one of the pioneers in Latin America’s startup scene, with an IPO way back in 2007.
In addition to Buenos Aires and cities in Brazil, cities like Mexico City and Medellín are vying to build startup ecosystems as well.
But the country in Latin America that really set the precedent is Chile. The state-sponsored program Start-Up Chile is run by Horacio Melo, whose team manages a fund that allocates to each entrepreneur a chunk of seed money to play with and a one-year visa. In 2013, Start-Up Chile allocated $40K to each of its 300 startups.
“We welcome startups that are going global,” says Melo. “That being said, it’s quite obvious — and reasonable — that the startups attracted to Start-Up Chile are those who are coding, and therefore the location of their work doesn’t matter that much; who thinks of LatAm as their target market; and who thinks of Chile as a platform to test, and plan to later expand to LatAm and the world.”
Hennessey comments, “Chile has very good laws, very good investor protection … it’s a very safe environment.”
But those following the Chile model and competing to build their own startup ecosystems — like Brazil — face several drawbacks.
Despite its burgeoning middle-class market — desperate for goods and services that technology companies can deliver — Brazil suffers from what Hennessey concisely calls “a bureaucratic nightmare.” Ay, the troubles of Latin America. And yet — it’s a mess that Chile, and only Chile so far, has successfully sorted out. Incorporating a company takes 24 hours to two days in the U.S.; in Brazil it can take around 180. And that’s just to register a name.
Sometimes taxes on a foreign employee add up to twice the salary the employee makes.
And then there’s infrastructure — another major, um, roadblock. For startups seeking to build e-commerce, the market is easy to find, but getting product to the market is not so easy.
Hennessey worries that another big issue for Latin American startups “is how much founders and founding partners of the VC firms are going to get taxed.”
The custo is what Brazilians call the exorbitant set of taxes a company has to pay the government in order to operate. Founders get plenty wary of those impositions. Marmulstein says that sometimes taxes on a foreign employee add up to twice the salary the employee makes.
Perhaps the biggest fight is for talent, though. Conrad Egusa, an entrepreneur and investor based in Colombia, is convinced that “immigration is the secret ingredient” for Latin America’s startups.
And Marmulstein knows fellow foreign entrepreneurs who had to leave their startups in Brazil because they couldn’t get a visa to stay. If Brazil doesn’t change the rules to make it easy for foreign entrepreneurs to dig in quick, they’re likely to go elsewhere.
Marmulstein’s visa process has already been delayed once. But he’s set on Rio. Marmulstein sees “significant opportunity to be a changemaker in the Brazil startup ecosystem.” His fate, though, is really in Brazil’s hands. So does Brazil want to change its world just as much as a young generation of entrepreneurs wants to change theirs?