Make way for the BRIC countries! With the western economies mired in recession over the past few years, the engine of global growth has been without question Brazil, India, China and Russia. At their fourth annual summit in March, the BRIC countries discussed collaboration and policies that would give these powerhouses a greater voice in the global markets and reduce their reliance on the developed economies. Now that the BRIC countries account for 40 percent of the world's population and a fifth of its economy (WSJ - 4/1/12), we can all agree that the world has indeed shifted.
Expanding From Asia
China has the largest economy of the BRIC countries and much has been made of its astounding growth in the past decade, having risen to the number two global economy behind the U.S. Bay Area venture capital firms began to take notice of the tremendous opportunities in Asia in the early part of the last decade. Many of the Silicon Valley's most visionary venture capitalists were quick to open up offices in Shanghai and Beijing, and at around the same time moved into South Asia to the cities of Bangalore, and Mumbai.
However, with the abundant liquidity available in the China market for venture capital and private equity investors, competition for deals from both local and global funds have driven up valuations. Many institutional investors have begun to question whether China has become too hot. India continues to show promise, but there have not been significant exits to return capital to investors. The discussion in the hallways of the various private equity conferences around the globe have shifted from being centered on Asia, to other developing growth markets.
Perhaps the hottest region of opportunity right now is in South America and in particular its largest economy — Brazil. In many ways the rise of Brazil has been stealthy, at least from a venture capital and innovation perspective. The B of the BRIC nations has quietly grown to the number six economy in the world, having recently surpassed the United Kingdom. Its economy is coming on like a freight train, driven by its abundance of natural resources, in particular oil, gas, minerals and agriculture. I suspect it won't be long before Brazil overtakes France as it continues to move up the league table of world economies.
Brazil is a big country, larger in land mass than the continental United States. Its population of nearly 200 million people makes it the most populous country in South America. The booming economy has pulled 30 million people out of poverty into the growing middle class and consumer consumption is on the rise.
With relatively high Internet penetration and usage rates, the globally opportunistic venture capital community on Sand Hill Road has taken notice. The Valley's leading firms are parachuting in to invest in Brazilian opportunities, m any of which are based on successful western models but localized and applied to the Brazilian market. In fact, in March Redpoint Ventures announced a joint venture with BV Capital to form São Paolo-based eVentures to invest in early- stage entrepreneurs. Global investor Intel Capital has been in Brazil for 10 years and has had strong track record of success.
The Brazilian venture capital industry appears ready to develop in a way that will mirror what happened in China and India, although possibly on a smaller scale. Last year, early- stage investing in Brazil grew 360 percent over last year to $46MM (LAVCA Industry Data Analysis 2012). The influx of international VCs is bringing best practices and global sophistication. Also similar to the China market, most investment today is aimed at the large domestic Brazilian market. However , Brazilian entrepreneurs are poised to build globally leading companies, with strong entrepreneurial spirit, talented engineers graduating from local universities such as Federal University of Pernambuco , and the arrival of Brazilian's own "sea turtles" returning from the ranks of Stanford and MIT.
A View from the Rio and São Paolo
During my most recent visit to Rio de Janiero and São Paolo, I was struck by many of the similarities the Brazilian innovation ecosystem has with China and India. When I stepped off the plane in São Paolo, I felt the same electric energy that fills the air in Shanghai and Beijing — an excitement that things are changing, evolving, and that I was entering a land of seemingly endless opportunity.
As in Shanghai, the skyline in Sã o Paolo is fiercely developed. A sprawling city of 20 million, São Paolo boasts more helicopters per capita than any other city except Manhattan. Part of the reason for all of the helicopters is the terrible traffic in São Paolo, a characteristic it has in common with Chinese cities like Beijing and Shanghai. São Paolo and Rio de Janiero are the obvious cities of choice for market entry. While many of the local entrepreneurs I met with were based in Sao Paolo, there are many strengths that Rio possesses that make it a good destination as well. ( One example is Rio Business, an inward investment group funded by the city to provide free set up advice and services.)
With regard to costs, Brazil is fighting a strengthening real and high inflation, but I was actually shocked at the USD costs in São Paolo. Business class hotels and restaurants are very cosmopolitan, but would give Manhattan or London a run for its money in terms of expense. One barometer I have as I travel internationally is the cost of WiFi access. In a standard business class hotel in São Paolo, WiFi access for 24 hours was 37 real, or nearly 30 USD. I would say this may be near the zenith for any city I've traveled to for business.
Why is it so expensive in Brazil? In addition to the aforementioned inflation and strengthening currency, Brazil is a high tax environment. Import duties run at 70-80 percent. As such, the Brazilian consumer grins and bears the seemingly higher cost goods and services that accompany strong economic growth.
There is an incredible market opportunity in Brazil. GDP growth is projected to continue over the next few years at 2.5-3 percent . The infrastructure of the country still needs development and the purchasing power of the middle class continues to gain strength. Of course with the soccer World Cup coming to Rio in 2014 and the Olympics in 2016, Brazil has the momentum to claim its place on the world stage.
However Brazil's legal and tax environment remains very complicated, and some local entrepreneurs actually consider it a barrier to entry to foreign competitors looking to enter the market. While Brazil's legal system is based on the rule of law, the courts move with a glacial pace, and they have a reputation for being very labor friendly. As such, it is important for a foreign business seeking to enter the Brazilian market, to find trusted local partners to help navigate the complexity of the system.
Like our friends in the VC community, we anticipate that our clients and partners will begin to be regulars on the flights to São Paolo (Note to the airlines: P lease add a direct flight from SFO to São Paolo!). We wish them every success as they look to enter this exciting and dynamic market. Please don't hesitate to contact the Global Gateway at SVB if you require any assistance or have questions.