Beyond Carnaval: The Pursuit of Foreign Investments
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:
The Rio-São Paulo exclusive club
Reasons that led Brazilian entrepreneurs to seek foreign investments
Government Policies and Initiatives to attract foreign capital
In my semi-nomadic life between Portugal and Brazil, specifically Lisbon and Brasília, I always plan ahead to spend quality time with my friends and family. However, for this new chapter of my life—where I'm making long-term decisions (apparently the 30th crisis is real)—I've also dedicated time to focus on business and spread the news about I'm No Economist.
During one of my business meetings, I met a friend who is a natural entrepreneur, driven by an instinct to create and succeed regardless of his environment. A big and important part of this story is: he hails from Brasília, the capital of Brazil.
For those unfamiliar with Brasília, it was built in the Cerrado - a vast tropical savanna region in Brazil known for its unique biodiversity and distinctive landscape - to serve as the new capital of the country. Since its official launch 64 years ago, Brasília and its metropolitan area have grown to an estimated population of over 2.8 million people.
This might seem like a lot compared to European cities, but for our country, it is still a growing one. And despite being home to the most important institutions, mainly because of political interests, the entrepreneurial ecosystem is still young.
Returning to my entrepreneur friend: he faced significant challenges to be recognized as a true entrepreneur in Brazil - not only for that - but because he started his journey outside what Brazilians consider the old "Eixo Rio-São Paulo" (Rio-São Paulo axis).
As we invited him to share more about his journey on an edition of Open Zeitgeist, I will let him tell it when the time arrives.
But for this edition of Beyond Carnaval, we thought it would be interesting to highlight some of the reasons that led Brazilian entrepreneurs to seek foreign investments.
Because, a big part of deciphering Brazilian potential for foreign investment is grasping why local entrepreneurs seek it in the first place.
The Rio-São Paulo exclusive club
AI helped me with the research
The "Rio-São Paulo axis" refers to the region in Brazil encompassing the cities of Rio de Janeiro and São Paulo. Both cities offer access to capital, public and private support networks, and a highly skilled workforce, making them central to Brazil's innovation and entrepreneur landscape. This area is also significant for the country due to its economic, cultural, and political influence. And even though I believe the contribution comes more from São Paulo than Rio nowadays, the combination of these two cities is still known as an important hub for business, finance, industry, and culture.
However, São Paulo's startup ecosystem is fiercely competitive, boasting around 1.098 startups, representing 47% of Brazil's total. For newcomers, breaking into this crowded market can be intimidating. Moreover, the high costs of living and doing business in Rio de Janeiro and São Paulo present challenges for entrepreneurs with limited resources who wish to relocate and compete, as these cities have respectively the first and second highest costs of living in the country.
To succeed in these cities, entrepreneurs need exceptional talent, innovative ideas, and strong support networks. For those not already integrated into the local entrepreneurial communities, accessing these resources can be particularly challenging.
Sometimes it is easier just to go abroad.
Access to Capital and Resources
As Brazilian entrepreneurs navigate the complexities of their local ecosystem, many are increasingly looking beyond national borders to secure foreign investments. One of the primary motivations is the access to capital that it provides.
While Brazil has a burgeoning startup scene, access to sufficient funding can be challenging, especially for early-stage ventures and those outside major economic hubs (like Eixo Rio - São Paulo), as only 17% of VC deals in Brazil in 2020 went to later-stage startups, indicating a funding gap for more mature companies.
Although investment in Brazilian startups has been growing, overall funding levels are still low compared to other major markets like the US and China. For instance, in 2021, Brazilian startups raised a record $5.2 billion. However, this amount is significantly less than the $156.2 billion raised by US startups in 2020.
Moreover, foreign investors accounted for only 29% of VC deals in Brazil in 2020, indicating substantial room for attracting more international funding into the ecosystem.
Foreign investments bring not only financial resources but also strategic insights and global networks that can accelerate growth and market expansion for Brazilian startups.
Diversification and Risk Mitigation
Another compelling reason for Brazilian entrepreneurs to seek foreign investments is the opportunity to diversify risk. Brazil's economy is known for its volatility, influenced by political instability, fluctuating commodity prices, and currency depreciation. This economic instability is well-documented by the Foreign Direct Investment (FDI) index, which reflects how international investors navigate the challenges and uncertainties in Brazil over the years. By securing foreign investments, Brazilian entrepreneurs can mitigate these risks and gain more stability.
Securing investments from international sources allows entrepreneurs to hedge against local economic risks and reduce dependence on domestic market conditions.
Diversifying funding sources also enhances resilience during economic downturns or periods of market uncertainty. This approach enables startups to maintain operations, retain talent, and continue innovation initiatives even when facing challenges within the local economic landscape.
Government Policies and Initiatives
Recognizing the importance of fostering entrepreneurship and innovation, the Brazilian government has implemented various programs to attract foreign capital and support the growth of startups as tax incentives, regulatory reforms, and partnerships with international organizations aimed at facilitating cross-border investments.
A good example:
Eco Invest Brasil: a Brazilian government initiative aims to attract $27 billion foreign private investment for ecological transformation by providing currency hedging solutions for sustainable projects.
Moreover, bilateral agreements and trade agreements with key global economies provide a framework for facilitating investment flows and creating a conducive environment for foreign investors.
Note: These two writers (Leo Torres and I) still think more should still be done. And we are doing our part on that.
While Brazil offers a fertile ground for entrepreneurship with its large consumer market and vibrant startup ecosystem, the decision to seek foreign investments represents a strategic move for many Brazilian entrepreneurs. By accessing international capital and resources, diversifying risk, and leveraging global networks, startups can accelerate their growth trajectories and enhance their competitive position in both domestic and international markets.
As entrepreneurs navigate the complexities of building sustainable businesses in Brazil, the pursuit of foreign investments emerges as a pivotal strategy in unlocking new opportunities and driving long-term success.
The Brazilian data protection authority (ANPD) has suspended Meta's new privacy policy that allowed user data to be used for training AI systems. This sets a precedent for the agency to take action against other tech companies using personal data for AI training. (source: Fast Company)
The American bank, Bank of America has started recommending a Brazilian stock that has risen more than Amazon since 2000. The stock is Localiza, a Brazilian car rental company. Since 2000, Localiza's stock has gained over 12,000%, outperforming Amazon's 10,000% rise in the same period (source: Exame)
Eve, Embraer's urban air mobility startup, has raised $94 million in a new funding round. The company aims to develop electric vertical take-off and landing (eVTOL) aircraft for urban transportation. (source: startups.com.br)
Natura, a Brazilian cosmetics company, has raised 1.3 billion Brazilian reais through the issuance of green bonds. The funds will be used to finance sustainable projects and initiatives that support the company's environmental and social goals. (source: Valor)
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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.
Investors are closely looking for opportunities in our country. It is our job to decipher Brazilian potential.
I love this. Thank you for sharing a bit of what we've been doing. It was lovely having you in SP