On Sunday, the GIP team arrived in São Paulo: Brazil’s economic powerhouse boasting a 20M population and a cosmopolitan vibe to rival New York’s. We were immediately welcomed with an all-you-can-eat meat festival (churrascaria) and rounds of caipirinhas exploding with lime. After dancing the night away to the Brazilian beats of samba and funk, we woke up bright and early the next day to begin our company visits in the city. We spanned diverse industries, ranging from finance and footwear to the emergent startup ecosystem. As we listened to presenters and volleyed them with questions, we noticed themes about the business landscape in Brazil, which will be covered in the next few posts.
First, Brazil seems to be a self-contained market. Domestic factors such as consumption mostly shape monetary conditions. This partly explains why Brazil was relatively insulated from the global financial crisis in 2008; in fact, their economy was strongest around 2010 only to later fall into recession in 2015. Moreover, while the importance of foreign trade to the Brazilian economy is growing, it is still relatively small compared to the entire economy. In 2018, exports were $239B USD and imports $181B USD versus $2T USD GDP. Where it’s large, it’s mostly in primary products. Finally, many Brazilians never travel out, very few Brazilians speak English, and the country doesn’t share a primary language with the rest of Latin America. Combined with the enormous size of the country (209M), the remaining room for economic development and ensuing market potential, it’s not hard to imagine why the economy is relatively inward-looking.
Companies stay local in Brazil. One impact is that with the large companies we’ve visited, globalizing has either not been on the table or is a complex challenge approached very carefully. Cielo is Brazil’s leading payment processing company (processing 10% of Brazil’s GDP annually) yet faces rapidly eroding market share due to loss of previously held concessions. As they fight to remain the leading player, they’ve chosen to innovate on their core business model rather than consider expanding into other countries. For Havaianas, the iconic Brazilian flip-flop company, domestic sales represented 98% of total, which is remarkable since Havaianas started selling in 1962. But why would they, since 73% of Brazilians touch Havaianas at least once a year? The wildly successful globalization of the brand is a major source of pride for Brazil, since they are one of very few Brazilian companies that has successfully globalized, and Havaianas brand seeks to embody the Brazilian spirit and values. Havaianas accomplished this by moving piecemeal country-by-country and establishing regional offices to accomplish something new.
Another impact seems to manifest in the distribution of sizes and types of businesses we see in Brazil. Many industries exhibit an oligopolistic structure historically dominated by a few large Brazilian companies. While the formal (and informal) MSME market is enormous, the market for start-ups is small and treacherous especially as they try scaling into mid-size companies. We learned from Redpoint Eventures, a formidable player in the nascent venture capital scene here, that lack of available financing is the biggest challenge for scaling: even more so than navigating the Kafka-esque systems required to launch a business. There is a lack of local investors with a VC-level appetite for risk. Even when there is foreign interest in investing, the available check size doesn’t match the real stage of development of the company in a Brazilian context. This makes it very difficult for start-ups to flourish and scale into mid-size companies with potential to disrupt large incumbents. More optimistically however, those start-ups that do survive the brutal incorporation and financing process at the beginning tend to emerge bullet-proof and extremely cash-generative. We were excited to learn how Redpoint Eventures took matters into their own hands by partnering with Itaú, a major bank in the country, to build an incubator and nurture the emerging start-up ecosystem in Brazil.
Which brings us to another theme: serendipidade, or serendipity/luck/chance. When we visited Cubo, Redpoint & Itaú’s incubator, we all wondered why a bank and a VC firm would partner to launch such project without taking equity in the businesses there. Among other reasons, they simply want the multiplicative effect of bringing innovators under one roof. Cubo provides entrepreneurs the chance to meet someone and do something. Just like the simple production error that spawned a thousand SKUs at Havaianas, Cubo believes that the unexpected combinations of interactions there will spur growth of the Brazilian start-up ecosystem.
I hope that Brazil will continue to open up and invite more serendipidade through increased exposure and international exchange. There is a trend: exports have actually doubled since 2005 and imports have nearly tripled. While I was writing this post, Brazil eliminated US visa requirements. In my opinion, the more random combinations, the better. There is even some serendipidade in our own Chazen trip to Brazil. Who knows how the connections we’ve made and the learnings we’ll export back to our own countries will manifest in the future?