Brazil: Just Getting Started

I just returned from Brazil this week, and it is an amazing place. Beautiful. Full of life. Welcoming. Filled with Huge Opportunities.

My first thought is “I need to go back soon!”

My second thought is “I really need to spend more time, and it should be soon!”

I had the privilege of meeting some amazing people, including founders of top technology companies, and investors who were investing in Brazil long before the hype. This was not a long trip, so I am the first to say that I am just at the tip of the iceberg in terms of my knowledge of the market and the opportunities. What I really learned on this trip is how much more I need to learn…which means I need to go back- sensing a theme? 🙂

I spent a few days meeting with many people in the ecosystem, and my biggest takeaway was similar to what I felt when I was first looking at investing in Germany– this market won’t behave the same as ours, so understanding the structure, behavior patterns and the people is critical for success.

A Few Statistics

Let me give you just a few examples:
– If you want to ship to all parts of Brazil, you work with about 15 different delivery carriers
– At least 20% of people pay with cash (COD or with boleto)
– Order furniture online (only one or two online stores) and you can expect it to arrive in…… wait for it……… 37 days.
– About 82% of people with mobile phones in Brazil are on prepaid plans and don’t have smartphones
– Sao Paulo orders more pizza per capita than just about any city on earth
– It is easy to make a $12 purchase in $1 installments for a year
– Brazil has the world’s first sustainable biofuels economy, and most of their cars can run on pure ethanol

In the next 10 years, the equivalent to the population of France will move up into the middle class!!

Opportunities and Challenges

When you read a few of these stats, you can see why there is huge excitement about Brazil. Opportunities everywhere, and their natural resources, demographics, and the fact that things are just starting to ramp make the story extremely compelling. In many industries, there are no online incumbents, so there are plenty of first mover opportunities. And these exist in places you might not expect. Lead gen is barely started, commerce in some categories doesn’t exist. Companies like Google and Microsoft are very active in their outreach and assistance for startups.

Brazil is also attracting talent from many places. I had one dinner where I think almost the entire group of 15 was from Germany! Less snow in Brazil…:-). Brazil reaps the benefit from experienced entrepreneurs coming and training other entrepreneurs; the ecosystem is developing quickly. And of course, the kingpin here is Rocket Internet, which has over 2,000 employees in Brazil and has launched more than 14 companies. This isn’t going to take long.

On the flip side, for all of the top line stats, the blocking and tackling of execution is tough, and adoption of technologies and habits won’t happen overnight. Sure, smartphones are becoming less and less expensive, but what if excessively high cost for data and poor capacity slow adoption, or change usage patterns? The last mile in eCommerce is absolutely critical, and it isn’t easy in Brazil. For many eCommerce companies, a significant percentage of their sales are to people buying on the Internet for the first time. Patterns are just developing. It was also noted that Brazilians will move from one service to another quickly. See Orkut. It is not easy to scale a company in Brazil and there are only a handful of big successes to date.

Good Until Page 5

I had one particularly enjoyable meeting with an extremely impressive founder, and not only is he one of the most impressive founders I’ve met, he is one of the most insightful and market-aware people I have met anywhere. He has done some angel investing, and he says that many startups in Brazil are “good until page 5.” He made a few angel investments and has since stopped because to steal another beauty from him, “many founders haven’t been in the pool before.” He sees the ecosystem developing very quickly, but thinks that there are only a small number of “investable” companies at this point.

Investment Waves

One consistent conclusion that most shared was the fact that there was a big wave of investment around the end of 2011, and a big hype cycle that went with it. Since then, the investment pace has slowed quite dramatically, and people see it in more of an equilibrium now than it was previously. Some are waiting for valuations to come back down a bit as they said that they “hit US levels.” Everyone believes there is amazing long-term opportunity, and some companies that will be huge successes. I met companies that made over $100M in revenue in their second year. I also spoke to quite a few who think there will be a lot of failures this year, and in the next couple of years. They think too many people were funded and the market won’t support very many. It remains to be seen how the investments already made will perform, but the consensus seemed to be that there would be a lot of failures and a few big winners. Sounds familiar, doesn’t it?