Brazil’s Growing Startup Scene May Lead to an IPO Windfall

Latin America is experiencing a startup revolution. Latin entrepreneurs are exhibiting world-class vision, business acumen, and tenacity. They are improving people's lives, creating jobs at a large scale, and giving tremendous value to their shareholders.

Brazil, the continent’s largest country, is leading this trend. Its startup industry is soaring to new heights, and its local stock market may reap the benefits.

Brazilian companies raised the highest capital in a single quarter in Q1 2021, according to KPMG, when $1.4 billion was invested in local digital start-ups. That record remained until the second quarter of 2021 when Brazilian startups then raised $2.7 billion.

What caused this and is this a sustainable trend?

The Growing Digitization in Brazil

Brazil already provides an ideal environment for both domestic and international businesses to create and test innovative digital goods and solutions.

As of 2019, 70% of Brazil’s 211 million citizens had access to the internet. This is the highest in South America. Brazilians also spend over 9 hours a day on the internet, despite serious infrastructure limitations.

As more and more Brazilians use the internet, many entrepreneurs and companies have taken advantage of this boom to provide digital services.

In a 2015 survey, 39% of the population was categorized as “early adopters” of digital apps - one of the highest proportions in the world. The country is also a top market for creative apps.

Other trends further show the growing digitization in Brazil.

In 2019, 78 percent of Brazilians who had access to the internet used subscription services such as Netflix at least once a week. In 2018, 40.8 million internet users utilized taxi or transportation apps as a mode of transport. Between 2017 and 2019, the number of digital food orders in Brazil has also increased fourfold. Food delivery apps are also now available in over 500 cities around the country.

These clear trends showing growing digitization make the country ripe for a rise in technology startups and IPOs.

The Rise of Technology Startups in Brazil

There were 56 IPOs in Brazil over the last decade, but only two were in the technology sector. This reflects the investor profile that dominates local markets, which is accustomed to allocating assets to firms in industries such as oil, paper, mining, and utilities.

Historically, publicly listed companies in the nation were considered bargain opportunities. This is because few of them had considerable exposure to the domestic market and relied heavily on commodities and exports for revenue.

As a result, companies focusing on the domestic market or domestic growth were never fully accepted by local investors. Many of the investors putting capital in Brazil were primarily international and highly risk-averse to the dynamics of the domestic market.

In 2007, when Brazil saw a similar IPO boom, foreign investors accounted for 70% of the demand for equity offerings.

How did this change and lead to the rise of tech startups gaining momentum in the domestic market?

According to reports, equity crowdfunding is quickly gaining popularity in Brazil, with many digital firms seeking funding options in an uncertain economic climate. Venture investors, like Redpoint eVentures, Kaszek Ventures, Valor Capital, and Monashees, have also heard the call to step up and help new digital firms.

This led to the country producing three new startup unicorns in early 2018. The first was 99, which was purchased by Didi Chuxing for a reported $1 billion. Then, PagSeguro raised US$2.7 billion in its January 2018 IPO, with Nubank following soon after, becoming the third unicorn of 2018. The company raised US$150 million Series E financing in March 2018.

Since then, Brazil has produced eight more unicorns.

Brazil is an entrepreneurial country, where an estimated 40% of the working population consider themselves entrepreneurs. This contributes to the growing acceptance of technology startups and the rising digitization within the country. In addition, the influx of funding and rising investor confidence has also fostered a conducive environment for startup growth.

The Government Is Playing Its Part

The flourishing startup space is getting help from the government as well. Favorable legislation is helping the industry become attractive to both investors and entrepreneurs, further facilitating growth.

The country enacted the Brazilian Declaration of Economic Freedom Rights in September 2019. Its goal is to free enterprise and prohibit the government from taking any measures that slow innovation, increase transaction costs without demonstrating benefits, or prevent the entry of new domestic or foreign competitors into the Brazilian market.

In November 2019, President Jair Bolsonaro also announced the start of the Mais Brasil Plan, an effort aimed at improving the business climate, boosting legal clarity, lowering interest rates, extending financing, and expanding commercial possibilities for investors.

In early 2021, the Brazilian Senate enacted the Legal Framework for Startups, which provides the framework to encourage the formation of innovative enterprises. It also creates incentives for individuals who invest in new, technology-based organizations. This legislation has since been passed into law.

These new legislations and plans have enabled local investors and entrepreneurs to access more profitable transactions. Private equity firms are now becoming more trustworthy sources of financial support. As a result, Brazil attracted more than $75 billion in foreign investment in 2019, making it the world's fourth-largest destination for foreign investment.

The Future Is Bright for Brazilian Startups

Momentum is clearly on the side of the Brazilian startup industry. Rising digitization, favorable legislation, and increasing investments look to continue the growing trend of successful technology startups in the country.

This has enabled Brazil's IPO market to set a record year for 2021, and there’s still a quarter left to the year with less than half of 2021 remaining.

The combination of historically low interest rates in Brazil, the recovery of Latin America's largest economy from the pandemic, and a thriving local money management sector has prepared the ground for a rapid surge in IPOs.

This decade might be an opportune time to invest in Brazil and Brazilian startups. The industry looks to be the catalyst that accelerates the nation’s economic growth. As favorable conditions and supportive legislation continue to ensure that technology and startups in the country have ample opportunities to thrive, it does seem like the party is just getting started in Brazil.