Beyond Carnaval: Brazil, The Final Frontier For Global VC Investment
Concise reflections, digests, and highlights of the week's significant news within Brazil's investment and innovation landscape.
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IN TODAY'S BEYOND CARNAVAL:
Comparing Brazil’s Innovation Landscape with Developed Countries
The Role of Venture Capitalists in Brazil's Innovation Ecosystem
How Can Brazil Benefit From Global Paradigm Shifts In VC Investments
Brazil is rapidly emerging as a hub for innovation. From the bustling streets of São Paulo to the tech corridors of Florianópolis, we're witnessing a surge in entrepreneurial activities and technological advancements - despite fiscal and political challenges.
Players, including venture capitalists, established corporations and startups are helping foster a vibrant innovation ecosystem and leveraging Brazil's unique market dynamics to drive growth and development.
Brazil is on the cusp of significant transformation in many sectors, from energy, blue economy, to finance and e-commerce, driven by paradigm shifts in innovation amidst fiscal challenges and a funding drought for startups.
As the country navigates economic constraints, it is important to keep exploring new strategies and models to sustain long-term innovation initiatives. Today we delve into how Brazil can leverage these paradigm shifts to position itself as a leader in innovation.
Comparing Brazil’s Innovation Landscape with Developed Countries
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Brazil's innovation landscape, while burgeoning, still lags behind developed countries in several key areas. This comparison reveals crucial insights and opportunities for growth in Brazil’s innovation ecosystem.
Research and Development (R&D) Investment
Compared to other emerging markets Brazil is not that bad, as we mentioned here. But as usual, this is an excuse given by those who can go above and beyond not to reach the same investment levels of developed economies. For instance, Brazil is ahead of Russia which invests 0.94% of its GDP in R&D, India with 0.65%, and South Africa which invests 0.60% of its GDP.
But developed countries like the United States, Germany, and South Korea invest significantly more in R&D compared to Brazil. According to World Bank data, countries such as the United States and Germany allocate around 2.8% and 3.1% of their GDP to R&D respectively, while Brazil invests about 1.3%.
Patent Filings
While mainly focused on industrial development and trademarks, patent filings are a proxy indicator of innovation. The World Intellectual Property Organization (WIPO) reports that countries like Japan, the United States, and China lead in patent applications, with Brazil lagging significantly.
In 2022, Brazil filed 6,984 patent applications, ranking 26th globally, while applicants based in China filed around 1.58 million patent applications, followed by the US (505,539), Japan (405,361), Republic of Korea (272,315) and Germany (155,896).
This gap highlights the need for Brazil to further incentivize its intellectual property infrastructure and encourage more homegrown innovations. Who will save us?
The Role of Venture Capitalists in Brazil's Innovation Ecosystem
Venture Capital is an asset class for the fierce at heart: high risk, high reward. Driven by power law, its strategy is to have 20% of its portfolio return at least 100% of the deployed capital. Not for everyone. In my silly little head, VCs are the knights of innovation investment.
Venture capitalists (VCs) are pivotal in any growing innovation scene. They are especially important in developing economies. By providing essential funding and strategic guidance, they help startups navigate the complexities of market entry and scale-up while creating a positive impact for the customers of these businesses.
Brazilian VCs have been instrumental in backing some of the country’s most successful tech companies. According to LAVCA (Latin America VC Association):
"Notable fund closes over USD250m include Mexico Infrastructure Partners’ FIECK 23 (USD2.4b), Mubadala Capital’s Brazil Special Opportunities Fund II (USD710m), KASZEK Ventures Fund VI (USD540m) and Opportunity Fund III (USD435m), Jive’s Distressed and Special Situations Fund IV (USD503m), Bicycle Capital’s Fund I (USD440m), XP’s Private Equity Fund II (USD319m), Kans Capital’s Growth Fund I (USD280m) and Trelia Energy Advisor’s energy infrastructure fund for the Dominican Republic (USD271m)."
Despite the downfall of a few companies given the macroeconomic challenges the world has noticed in the last 2-3 years (but experienced without really noticing in the past ~15 years after the Global Financial Crisis), Brazil and especially São Paulo have reaped the rewards of such high-risk investment:
São Paulo's entrepreneurial ecosystem is valued at $108 billion, compared to $22 billion for the second largest hub in Latin America, Mexico City.
São Paulo is home to 12 of the 24 unicorns operating in Brazil.
Those benefits were noticed by corporations, which in turn raised their own funds and started investing in Brazil's future:
The newly set up Corporate Venture Capital (CVC) funds are still small, <$50Mn, and making just a handful of investments each year. But are set up for success with independent legal structures that would prevent a misalignment of incentives.
Firms such as MSW Capital, Vox Capital are prominent players that are helping develop the CVC ecosystem locally. CVC investment firms supporting corporations are already making a splash. In 2023:
"CVC-backed rounds represent 59% of the total investment volume in Brazil so far this year, despite corporations participating in far fewer deals. It marks the first time since 2018 that corporate-backed deals represented a larger portion than deals in which no corporates participated."
How Can Brazil Benefit From Global Paradigm Shifts In VC Investments
One of the most significant shifts is the increasing emphasis on sustainability and ESG (Environmental, Social, and Governance) criteria. Brazil is well-positioned to attract ESG-focused investments. The country's potential in solar and wind power, coupled with initiatives to reduce carbon emissions, aligns perfectly with the global push towards sustainable development.
You already know that, as we've been hitting the same key for a while here, here and here. But to prove we're not a one-trick pony, there are many other ways to skin a cat (poor guy):
Digital Transformation and Technological Innovation
The global shift towards digital transformation has accelerated, especially post-COVID-19. Technologies such as artificial intelligence, blockchain, and the Internet of Things (IoT) are at the forefront of this transformation.
With a population of over 210 million, Brazil offers a substantial consumer market. The growing middle-class is more and more adopting digital solutions, presenting ripe opportunities for sectors like e-commerce, FinTech, and EdTech - we mentioned it here asking if the 109 million middle-class population is enough to spark investment interest.
Assessing Economic and Political Risks
Not every sky is blue and clean. There's an immense challenge to assess fiscal and political risks. I can only imagine how VC firms spend 80% of their time explaining Brazilian fiscal policy and regulatory risks to their LPs. We'll touch more on that in the coming editions.
Brazil's economy is subject to fluctuations due to political instability, inflation, and currency volatility - see the 18% BRL devaluation year-to-date. Investors need to be prepared for economic cycles and have strategies to mitigate risks associated with macroeconomic factors.
And least but not unimportant, understanding, and helping advance, the local regulatory framework is crucial. Brazil has complex tax laws and regulatory requirements that have and can still impact business operations.
Americanas S. A. has announced the closure of its Submarino and Shoptime websites as part of its ongoing financial restructuring efforts. Alvarez & Marsal who's conducting the restructuring is diligently looking at Americanas' P&L, apparently. (Source: Revista Oeste)
Enel São Paulo appoints a new CEO and unveils a $6 billion investment plan to recover from previous financial crises. (Source: Exame)
Marking the 30th anniversary of the Real Plan, Roberto Campos Neto emphasizes the necessity of a long-term fiscal anchor for Brazil. (Source: Exame)
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Every Thursday 06:09 am (BR time), the Beyond Carnaval newsletter offers concise reflections, digests, and highlights of the week's significant news within Brazil's investment and innovation landscape.
Delivered on the first Saturday of the month at 06:09 am (BR time), the Open Zeitgeist newsletter provides a space for both Brazilian and "gringo" guests to share their perspectives on Brazilian investment opportunities.
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