Brazil lures venture capital as startups defy economic malaise

[RIO DE JANEIRO] To understand the venture capital scene in Brazil, follow the smartphones - not the economy.

That's the message from Doug Leone, a partner at Sequoia Capital, an early investor in both Google Inc. and LinkedIn Corp. His firm committed funds last year to Sao Paulo-based Nubank, a technology-based financial-services company.

Local startups are reaping the benefits of a global venture capital community that's hunting for markets with large, uptapped bases of Internet-using consumers. The current economic malaise aside, Brazil fits the bill: Tens of millions of people joined the middle class during a decade-long commodities boom.

"A month doesn't go by where we don't have a Brazilian company that we're looking at," Mr Leone said last month in a phone interview from Menlo Park, California. "What you're seeing is a moderated Brazil still. If things start to turn, you're really going to see the avalanche of investors."

Brazil has 282.6 million mobile-phone lines, or 1.39 per person, and users are quickly transitioning to newer technologies conducive to mobile Internet use, according to Anatel, the nation's telecommunications regulator. The usage numbers make Brazil the world's fifth-biggest mobile-phone market, according to research group Mobiforge.

Brazil's sputtering economy doesn't seem to be dissuading venture capitalists: Firms quadrupled investments in the country last year to US$197 million, the most since the Emerging Market Private Equity Association started compiling the data in 2010.

Sequoia, Amadeus Capital Partners and Phenomen Ventures all say they expect to make more investments there this year. While China and India are the top developing-nation recipients of venture cash, Brazil's share of the total is rising.

Brazilians also happen to love the Internet - the favoured sector of venture capitalists.

According to management consulting company AT Kearney, 71 per cent of Brazilians say they connect to the Internet at least once every waking hour, the most among 10 nations studied. More than half of respondents say they're connected more or less constantly throughout the day.

That's "huge" for companies, according to Hana Ben- Shabat, a partner at AT Kearney.

"The implication of that is you can actually target very specific consumers at any given time," Mr Ben-Shabat said by phone. "You can reach these consumers on the go."

Smartphone sales rose 7 per cent to 70 million units in Brazil last year, compared with a 48 per cent drop in sales of simple mobile phones, according to consulting group Teleco. In the first two months of 2015, smartphone sales expanded another 26 per cent from the year-earlier period.

And the population is young. Of about 195 million people in 2010, 52 per cent of Brazilians were under 30, according to United Nations data. Only India is younger among the group known as the BRIC nations: Brazil, Russia, India and China.

The most significant Brazil venture capital investments of the past year sought to tap that potential.

Hotel Urbano, a Brazil online hotel booking service, got US$52 million last year in the nation's biggest venture capital funding of the period. The investors were Insight Venture Partners, an early Twitter Inc investor, and Tiger Global Management, an early investor in Facebook Inc.

Easy Taxi, a car service application for mobile phones similar to Uber Technologies Inc, got US$40 million in a funding led by Phenomen Ventures, while Movile, another application- maker, got US$35 million from Innova Capital.

Tiger Global declined to comment, while Insight Venture didn't respond to requests for comment. Veronica Allende Serra, a partner at Innova, said the Brazilian companies she invests in - including Movile - have operations beyond just Brazil and show "exceptional potential" for global growth.

All those investors managed to look past the fact that gross domestic product's predicted to shrink in the world's eighth biggest economy, and inflation has already jumped to an 11-year high.

Analysts covering the Brazilian economy forecast gross domestic product will contract 1.18 per cent in 2015, according to an April 30 central bank survey of about 100 analysts published Monday. Brazil's economy expanded 0.1 per cent last year. Fund managers say that's not enough to keep them away.

"We typically invest in tech which changes the way people interact with each other and/or businesses," said Dmitry Falkovich, founder of Phenomen Ventures, the Easy Taxi investor. "Short-term economic cycles don't matter for this type of investment." Even the stock market has turned more positive on Brazil's prospects. After collapsing a few months ago, it has rallied 22 per cent from its low.

There is one clear constraint to investing in the Brazilian technology market: talent to staff startups.

A 2010 United Nations report showed Brazil only produced about 30,000 engineering graduates a year. South Korea - with a population a quarter as big as Brazil's - had about 90,000.

"If I could change one thing about Brazil, I'd like to see way more software engineers," Leone said. "Software engineers are the backbone of tech." That, he said, could take decades to change.

BLOOMBERG