Driven by fintechs, investments in startups triple in Brazil in 2021

RIO DE JANEIRO, BRAZIL – The race for digitalization and the great global liquidity led venture capital funds, which invest in startups, to set a new annual record for investments in Brazil.

These funds invested R$46.5 (US$8.6) billion last year in Brazilian startups, tripling the amount recorded the year before, according to a survey by KPMG and the Brazilian Private Equity and Venture Capital Association (ABVCAP). It was the fourth consecutive year of record results.

The boost came mainly from startups linked to the financial sector (fintechs) and the insurance segment (insuretechs), which accounted for almost 30% of this amount, according to the survey. The list of the 10 largest investments in startups last year is a good indication of this dominance, with 4 operations linked to the financial sector.

As a result of the large injection of liquidity in startups, Brazil had an “avalanche” of new unicorns, as the companies that have a market valuation exceeding US$1 billion are called. Among them are MadeiraMadeira, Mercado Bitcoin, C6 Bank, Facily, and Olist.

ON THE FLIPSIDE

However, private equity funds, which invest in more mature companies, moved in the opposite direction, the survey shows. Investments of these managers in Brazil fell 19%, to R$7.3 billion, reflecting poor local economic indicators.

ABVCAP chairman Piero Minardi points out that this shift of investments toward startups is a Brazilian reality. In other countries, these figures tend to go hand in hand – in general, checks from private equity funds are larger.

The problem in Brazil is the lack of confidence in the Gross Domestic Product (GDP) – the market currently forecasts growth of less than 0.3% for 2021, well below the global average. “Venture capital is less susceptible to economic growth,” emphasizes Minardi, who heads U.S. fund Warburg Pincus in Brazil, the manager behind big businesses, such as Petz.

Minardi recalls that over the past few years, private equities also had their activities affected by the volatility of the exchange rate – which will continue to be an issue throughout 2022.

DISTINCT REALITIES

KPMG’s Leading partner of Private Equity and Venture Capital in Brazil Roberto Haddad says that the surge of the venture capital industry in the country became clearer in 2020, when the resources for this type of investment turned to Brazil. “Today young people know that if they have a properly conceived idea, they will have money available,” he says.

According to Haddad, the funds dedicated to early-stage businesses should remain heated this year, and there are many sectors to be explored, such as agritechs (startups dedicated to the agribusiness sector) and healthtechs (health care).

In addition, experts point out that this segment is less sensitive to the economic mishaps and suffers less from the interest and exchange rates, which technically can ruin the profitability of private equity funds.

The rising dollar has become a problem for funds focused on large companies that invested in Brazil a few years ago. This is because funds that bought businesses when the exchange rate was R$3 or R$4 may now lose money even if they sell the businesses for a higher price in Brazilian reais. When converting into dollars, the business also runs the risk of being worth less than the amount originally paid.

“The exchange rate is our main hindrance. This uncertainty is our Achilles’ heel.”