Investment in Brazilian startups is booming

Digital banking startup Nubank, founded in 2013 just before a sharp economic decline, has attracted investors such as Berkshire Hathaway Inc. and will soon hold an initial public offering in New York. In May, online services marketplace GetNinjas made its debut on Brazil’s stock exchange. Two months earlier, enterprise software company RD Station was purchased for $330 million in one of the country’s largest ever software deals.

Meanwhile, venture-capital funding in Brazil this year through Oct. 12 reached a record $6.4 billion, tripling the amount raised in all of pre-pandemic 2019, according to data firm PitchBook. That exceeded South Korea and Indonesia while surpassing the combined startup investments for Russia, South Africa, Turkey and Nigeria.

The boom is happening despite the challenges of navigating Brazil’s gargantuan bureaucracy and an economy that grew at an average annual rate of 0.8% between 2011 and 2019, underperforming 172 of 195 countries, according to the World Bank.

In recent years, new regulations in Brazil have promoted competition in industries long dominated by a few giants. Entrepreneurs have greater access to financing from a growing group of venture-capital investors. Internet use skyrocketed in the last decade, with Brazilians becoming prolific users of the mobile apps entrepreneurs were developing.

A global surplus of investible funds seeking yield in a superlow interest-rate world is also a boon.

The result: more Brazilians who would otherwise work at multinationals are opening their own businesses—often tech startups. More than 13,000 startups have been founded through October this year, 13 times the number in 2011, according to the Brazilian Association of Startups.

Nubank is emblematic of the new generation of companies. It has amassed 40 million customers, making it one of the world’s largest digital banks by number of clients.

The firm started out by offering a credit card, no fees charged, via a smartphone. It then added products like a savings account, loans, insurance, and investing services, taking on traditional banks, which are disparaged in Brazil for high interest rates and fees.

Until last year, Simone Lauar, 43 years old, who lives in a poor neighborhood in Rio de Janeiro, never had a credit card. “Where I live, we don’t have banks," said Ms. Lauar, who co-founded a community news site.

A Nubank account permitted her to get a credit card, save money and build a credit history, she said. That allowed her to start paying utility bills digitally and transferring money to family. “I no longer use cash. It’s safer," she said, referring to Brazil’s high crime rate.

Nubank benefited from Central Bank changes the last five years that created new licenses allowing qualified financial technology startups to provide lending, payments, and investments, creating competition for a banking sector that was dominated by only a few players.

“These are things that even in the U.S. the regulatory constructs are pretty opaque," said Mike Packer, a partner with Alexandria, Va.-based QED Investors, a Nubank investor. “For fintech and for innovation, Brazil has the most progressive, the most favorable central banking regulations in the world."

Brazil’s insurance regulator is trying to follow the central bank’s lead in creating more digital competition for that industry. In anticipation, 180° Seguros, a year-old startup looking to make insurance digitally accessible, raised $8 million in May in its first financing round.

Entrepreneurs who have made it are now reinvesting in other startups. Eduardo L’Hotellier, who co-founded GetNinjas in 2011, this year started investing in venture capital funds after his company’s IPO. So, too, is Eric Santos, who co-founded RD Station in 2011 in Florianópolis, helping turn the modest southern Brazilian city into a budding location for startup headquarters.

Strong returns are the draw. The investment of $2.4 million by São Paulo-based venture-capital firm Monashees into GetNinjas a decade ago turned into $23 million at the IPO, said Mr. L’Hotellier. The Astella Investments fund in São Paulo that backed RD Station in 2015 has a net annual rate of return of 50%, according to data provided by Astella co-founder Edson Rigonatti.

None of this was a given when they started. Mr. Rigonatti who co-founded Astella with Laura Constantini, said he struggled getting emails returned from foreign investors.

Today, Monashees, Astella and Argentina-based Kaszek Ventures, which invested in Nubank in 2013, have over a dozen funds combined.

Some investors say the venture capital market in Brazil risks overheating. And Brazil’s economy is always unpredictable. Inflation has been surging. On Oct. 27, the Central Bank hiked its benchmark interest rate to 7.75%, nearly quadruple what it was in February. In recent days, the currency has weakened, and the stock market has been shaken, reflecting anxiety over the populist government’s economic policies.

Kevin Efrusy, a partner with Silicon Valley venture-capital firm Accel and one of the few Americans who has stuck it out in Brazil, acknowledged the risk of wild macro-fluctuations.

“When foreign investors see these swings, they can get bucked off the horse," said Mr. Efrusy, who has invested in every Kaszek and Monashees fund since 2011. “Brazilians are used to kind of holding on and going through it."

This story has been published from a wire agency feed without modifications to the text