Brazil’s IT Startups Become Focus of International Investment Funds

While Brazilian Internet companies, especially those in the e-commerce segment and group buying websites, have suffered in the post-boom market of the last two years, the nation’s software …

"We usually invest between $2 million and U$4 million in startups," says Anderson Thees, founding partner of Redpoint e.ventures.

While Brazilian Internet companies, especially those in the e-commerce segment and group buying websites, have suffered in the post-boom market of the last two years, the nation’s software and IT startups have become the targets of specialized investors in the technology sector.

Venture capital and private equity funds such as Pinnacle Ventures, Redpoint e.ventures and HIG Capital are looking for opportunities to invest in the software sector in Brazil. Technology companies such as IBM, Intel and Microsoft have also supported Brazilian startups in the IT area. “Nowadays, the main investors’ focus is on startups that develop technologies using SaaS [Software as a service] and which involve applications related to health and education sectors,” said Gustavo Caetano, president of the Brazilian Startup Association (ABS), which represents 2,700 of Brazil’s 10,000 startups.

Redpoint e.ventures is a joint-venture between the investment companies from Sillicon Valley Redpoint and e.ventures that began operating in Brazil two years ago. Its portfolio includes companies such as Groupon, MySpace and Netflix and it has invested in 12 companies in Brazil, accounting for half of a US$130 million fund dedicated to investment in the country. The Redpoint target sectors are: Internet focused on consumers, e-commerce, education, healthcare, mobile and cloud services.

Recently, Redpoint e.ventures, in partnership with a fund from New York, Valor Capital Group, invested in a Brazilian startup, Nibo, which offers an online financial management platform for small and medium enterprises, aiming to increase the efficiency of the accounting process.  “We usually invest between US$2 million and US$4 million. This year, we have invested in three companies and we have deals at an advanced stage with another three,” said Anderson Thees, founding partner of Redpoint e.ventures.

Last year, Redpoint eVentures, in partnership with the Pinnacle Ventures fund and  the Chinese antivirus company Qihoo 360 Technology, provided US$30 million for PSafe, a company from the Xango group, which offers a free security solution for users’ data protection. PSafe currently has 9 million users on the Android platform, plus 20 million installations on Windows platform. “The greater part of the capital raised by PSafe was directed to its growth in the Android platform. Our goal is to reach 20 million active mobiles by the end of this year,” said Marco de Mello, Ceo of Psafe.

HIG Capital, an American private investment firm, also bet on the software industry last year. The company acquired a significant stake in LG lugar de gente, a leading human resource software company in Brazil.

HIG Capital is specialized in providing capital for small and medium-sized companies and it has over US$15 billion under management globally. In Brazil, HIG opened an office in 2012 and it has invested in five companies. “So far, LG is the only company in the IT sector in our portfolio in Brazil, but we are interested in expanding our presence in this segment,” said Fernando Marques Oliveira, managing director of HIG Capital Brazil. HIG is looking for companies with operating income (Ebitda) between 15 million Brazilian real (US$6.56 million) and 70 million Brazilian real (US$30.6 million).

Technology Company Investments

In addition to venture capital fund investments, technology companies such as IBM, Intel and Microsoft have also provided financial support for Brazilian IT startups.

Intel Capital, the venture arm of the American chipmaker, is looking for companies focused on mobile, big data analytics, software, digital services, enterprise services hosted on cloud and the Internet of things, explained Alexandre Villela, investment director at Intel Capital. Intel usually invests between US$2 million and US$20 million in each company.

Intel Capital has operated in Brazil since 1999 and has 19 Brazilian companies in its portfolio. It recently announced a capital injection in Navita, a Brazilian firm that offers enterprise mobility management services in Latin America. Last year, Intel invested in three companies: Geofusion, a leading company in the Brazil’s geomarketing industry; Webradar, a Brazilian company that offers data analytics solutions and operational intelligence; and Mandic, a Brazilian cloud computing provider.

IBM also launched Brazil’s SmartCamp program three years ago, as part of its global initiative to bring together entrepreneurs, investors and mentors in a discussion forum in order to promote the development of innovative solutions. SmartCamp selects startups that participated in the IBM Global Entrepreneur Program. The winning companies compete in the Latin American round.

In the IBM Global Entrepreneur Program, companies have free access to IBM’s cloud-based software platform for three years, besides having technical, business and marketing mentoring.  “We seek companies with innovative solutions in B2B, which involve cloud computing, data analytics, mobile, social business, smarter cities, smarter business, and which further have synergy with IBM’s Intelligent Business solutions,” said Marcela Vairo, alliances manager at IBM Brazil.

With the aim of supporting Brazilian tech firms in early-stages and accelerators, Microsoft launched a fund, the Brazil Accelerator of Startups FIP, in partnership with Espirito Santo Ventures (a company from the Espirito Santo financial group) and Qualcomm Ventures, last March. The fund raised 10 million Brazilian real (US$4.37 million) and has the potential of reaching 300 million Brazilian real (US$131.16 million). The initiative is also supported by AgRio, a development agency from the Rio de Janeiro State government.

“The fund aims to invest in technology-based startups that can bring practical solutions to problems in key areas of the Brazilian economy, such as education, defense, cyber security, health, oil and gas, energy, aerospace and aeronautics, sports, agriculture and environmental, finance, telecommunications, mining and strategic technologies, which involve cloud, mobility and high performance computing,” said Franklin Luzes, director of Microsoft Ventures. Each startup receives an amount between 120,000 Brazilian real (US$52,500) and 3 million Brazilian real (US$1.31 million). The first investment was in Acelera Partners, an accelerator that helps in the development of startups that have already gone through an acceleration process. The company is based in Sao Paulo at the Microsoft Technology Center (MTC).

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Post-Boom Market

After the euphoric period of 2009-2012, that led to company prices become overvalued in the technology sector, this market underwent a price correction in 2013. “The fall of transaction prices creates opportunities for investment,” said Villela, from Intel Capital.

Among the main difficulties for startups looking to expand their operations in the local market are the high levels of bureaucracy involved in setting up and conducting a business, the lack of capital available to companies in growth stages, and a poorly developed IPO market, which hinders the investors’ exits from businesses, Caetano said.

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