Startup Outlook 2019: The prospects for Brazil

The Brazilian startup scene has thrived in recent years in spite (or perhaps because) of Brazil's 2014-2016 economic downturn, driven by growing connectivity, the gradual digitization of services and the increasing need to solve everyday problems using technology.

According to Brazil's largest startup association ABStartups, in 2017 the country had around 62,000 entrepreneurs working in over 5,000 registered startups. That was more than twice the number recorded in 2012, when the country was still starting to deal with the phenomenon of startups and these companies were still trying to find their way.

In absolute numbers, Brazil is certainly one of the largest startup markets in the world.

But is that enough? How many of these companies actually succeed? Where does most of the venture capital come from and where is it mostly applied? And, above all, what are the perspectives for this segment looking forward?

"2018 was an incredible year for us. We saw strong participation of large companies entering the market, launching open innovation programs, bringing more and more capital to the segment, buying and investing in startups," Amure Pinho, head of ABStartups, told BNamericas.

"We expect this scenario to continue in 2019, with strong growth in the segment and new programs and spaces for co-working and innovation being opened up," he added.

On the regulatory front, Pinho believes that the incoming federal administration is more sensitive to advancing on proposals for the regulation of the segment and the creation, for example, of a specific legal status entity for startups, which is a long-standing request for the sector.

VENTURE CAPITAL

A key goal for the segment in the coming year will to ramp up the participation of local venture capital in funding startups.

Currently, most of the VC flowing to Brazilian startups comes from abroad, coming from China according to the head of ABStartups.

But even in these cases, foreign investment traditionally prioritizes more mature startups, with already products already proven to be viable and with established operations.

Pinho expects to see further diversification of funding, with a greater participation of local VC and of private companies in the funding of Brazilian start-ups.

GOING GLOBAL

Going global has traditionally been a major challenge for local startups. In this sense, another key objective for the segment in 2019 is to increase support for Brazilian startups to spread their international wings.

According to StartOut Brasil, a program for the internationalization of early-stage firms, Brazil still accounts for just 3% of the global startup market and there is, therefore, still plenty of room for growth.

For 2019, StartOut Brazil plans to increase and diversify the startups participating in its internationalization programs and global business missions. These initiatives are conducted in partnership with Brazil's export promotion entity Apex.

As such, 20 startups will be able to take part in the programs in 2019, which will take place in Santiago (Chile), Toronto (Canada), London (England) and Shanghai (China).

"For 2019, we have four important destinations that were not chosen at random. Rather, it involved hard work, surveying all market potential, the local ecosystem, accelerators and the convergence with our demands and offers," Apex investment manager Ricardo Santana said.

Of the selected startups, 15 will be firms that have never had this opportunity or which only participated in one edition. The five remaining firms will be startups who have been in two or more immersion cycles.

"We've begun to discuss in greater depth how we can contribute to the Brazilian innovation ecosystem. And we've learned how to use and enhance federal government initiatives with a sense of urgency. We're combining all our actions in the MDIC [industry, foreign trade and services] aimed at the industry of the future and for innovation," said Brazil's outgoing MDIC minister, Marcos Jorge de Lima. 

AGRITECH

A segment with potential to grow in 2019 is so-called agritech.

In 2017, the agribusiness industry saw its best annual result since tracking began in 1996. It grew 13% compared to the previous year and accounted for 70% of the 1% expansion in Brazil's GDP in 2017, according to stats bureau IBGE.

Recent data released by the center for advanced studies in applied economics (Cepea) from the Universidade de São Paulo show that the Brazilian agribusiness continues recovering and increasing production volumes, which stimulates demand for services and other economic sectors.

In November, ABStartups launched mapping of agtechs in Brazil, showing that 70% of the national territory had at least one startup in the agribusiness sector. According to the study, 37% of Brazilian states had more than three agritech startups.

Despite the numbers, Brazil is still far from being a reference in that market. Israel, for instance, which is considered the main agritech powerhouse in the world, has 400 agricultural technology startups, said ABStartups.

However, new companies, solutions and partnerships are emerging in the field.

For example, IHM Stefanini, a company controlled by Brazilian IT group Stefanini focused on the industrial segment, announced a joint venture with Hidroferti, which develops technological solutions for management and monitoring of the agricultural production process.

Together, they launched Hydrocontroll, a platform of products and services that encompasses the entire agricultural cycle. The solution uses concepts such as artificial intelligence, machine learning, automation and robotics for decision-making.

TELCOS

Telcos are also eyeing the potential benefits of partnering with or investing in agritechs.

For instance, Agribusiness is one of the focuses of an innovation program recently launched by Brazilian telco TIM.

As part of a major digital reshuffle, TIM created a digital transformation business unit and departments to deal specifically with startups, big data and digital channels, among others.

The company is betting on the development of open application programming interfaces (APIs), in the format of open innovation, that is, in partnership with startups. By November, the telco had around 200 APIs developed and 20 partnering startups.

Earlier this month, Oi opened registrations for startups interested in participating in an incubation program at Oito, Oi's co-working and open innovation site in Rio de Janeiro.

Proposals must be submitted by January 16 and the results will be out in February following the presentations (pitches) and the program kicks off in March with the expectation that it will last nine months.

Startups from Brazil and abroad can participate. The selection process will be carried with the support of ABStartups.

Meanwhile, Algar Ventures, the corporate venture capital arm of Algar Telecom, last week announced the results of the second edition of its own Algar Ventures Open Acceleration Program.

Some 15 accelerated startups were selected out of more than 640 submissions, said Algar. Together, the participating companies achieved a 61% increase in the number of their clients and a 103% hike in sales in the period of six months, according to the telco.

The program was carried out in partnership with global entrepreneurship group Endeavor. It lasted six months and offered companies mentoring. It also connected them with entrepreneurial communities and conducted meetings to identify business opportunities with Algar.

The process included 44 mentors from Endeavor and more than 15 C-level Algar executives, totaling around 100 hours of mentoring.

RETAIL

Retail is another segment increasingly looking to startups for investments or partnerships.

Magazine Luiza, Brazil's fifth largest retailer, announced last week the purchase of tech development company Softbox, the third technology startup acquired by the retailer in just over a year.

Founded 13 years ago in Uberlândia, Minas Gerais state, Softbox has 180 developers specializing in supporting other companies - be they retailers or manufacturers of consumer goods - to sell digitally to the end-customer.

Magazine Luiza says that the acquisition allows it to be a partner of vendors and the industry at all stages of online sales, offering Brazilian companies so-called Full Commerce.

"Today, most Brazilian companies are excluded from the digital world, without access to any marketplace," said Magazine Luiza CEO Frederico Trajano, "With the incorporation of Softbox, we will help other companies in their digital transformation roadmap."

The purchase and integration of Softbox also underpins the transformation of Magazine Luiza itself. The company wants to evolve from being a multichannel retailer to a digital platform, an ecosystem of companies based on technology, data and digital processes.

In mid-2017, Magazine Luiza acquired Integra, specialized in the integration of e-commerce to marketplaces, and a few months later bought Logbee, which was focused on logistics.