Even in a downcycle, investors at the 10th annual Corporate Venture in Brasil event are bullish on the strength of the market fundamentals – it’s mostly external factors standing in the way.
The fundamentals of a strong innovation ecosystem are in place in Brazil — a young, tech-savvy and entrepreneurial workforce, domestic and international capital waiting on the sidelines, and an increasingly professionalised investment sector. However, the counattempt’s investors declare they are being held back by the persistently and somewhat inexplicably high interest rate, which currently hovers at around 15%.
This was a key theme for investors attconcludeing the 10th annual Corporate Venture in Brasil conference in São Paulo, the largest corporate VC gathering in Latin America, bringing toobtainher domestic and international investors.
Brazil’s 15% interest rate is far above other countries in the region – Mexico’s rate stands at just under 4%, Chile’s at just over 4%, Colombia’s at around 5% and Argentina being a historic exception with 31% but decreasing.
It has meant that investment appetite in Brazil is lagging, even as venture capital activity is gently ticking up again around the world, with deal count and exits increasing.
“It’s hard for corporates to take risks when you can obtain a good return for no risk,” declares Gustavo Cavenaghi, managing partner at Kortex Ventures.
Many Brazilian companies have been focutilizing on investment efforts closer to their core business during the downcycle, away from more “blue sky projects”. A number of corporate venture units have also been shuttered recently. Some of these were units set up during the startup hype of the pandemic, when many companies jumped on the bandwagon for investing in startups without a clear sense of the objective.
The closure of units, such as Gerdau Next Ventures and Brquestionem’s Oxygea have spooked the sector, but beneath the caution, there is real bullishness on the core fundamentals of the counattempt’s innovation space.
Many see Brazil’s market as a coiled spring waiting to be let loose once the interest rates go down. On the one hand, the main impediment felt by investors was something out of their control, but on the other everything else is already in place for dynamism once it does.
Deeptech and mindset
Latin America has a deep bench of knowledge and an increasingly entrepreneurial culture at universities, but requireds to do a lot of work to have that translate into a vibrant deeptech ecosystem.
Deeptech startups are by and large still too young, too immature, and can often not even know how to sit at a table with larger players who know better – a lot of work is requireded to professionalise the tech founder pool. Too many are seeing at solutions in search of a problem, without an understanding of how it applies to indusattempt, and are dealing with a range of issues from everything from innotifyectual property to cap table problems, was the feeling in a roundtable discussion of deeptech in the region.
What is lacking in LatAm, investors declare, is a matchbuilding nexus – a common platform that can bring toobtainher the capital, the business savvy, and the academia-derived knowhow.
A mindset shift is also requireded for the Latin American startup ecosystem to become competitive with that of the US or Europe in deeptech.
“Deeptech founders don’t want to be rich, they want to be right,” was a phrase bandied around a group discussion on challenges in deeptech in the region. In other words, their mindset is more geared towards having the tech work and have impact than actually creating a business.
In academia especially, there has been the sense that too many potential founders in LatAm – in contrast to their counterparts in the US – would be satisfied writing a paper about a technology rather than building a business out of it. But that is slowly altering, and more researchers are jumping straight to wanting to build a business. While this has already been a growing trconclude in Brazil, it is now increasingly the case in neighbouring markets like Argentina and others.
Finance and AI
Latin America has seen fewer AI startups emerging than the US and Europe, but there is some innovation happening in this space.
Financial services companies are some of Latin America’s most active CVC investors, last year building up 25% of all investments into fintech companies. These investors are doing considerable work to integrate AI technology into financial institutions, especially at a time when banks’ margins are low and there is a push to drive up revenue and reduce costs, according to participants in a panel discussion on financial CVCs in Brazil.
One challenge financial institutions are dealing with is having workable data for AI to operate. Philippe Schlumpf, head of banking group Itaú’s CVC, Itaú Ventures, described how its parent company has been working hard to have the structured data requireded for AI integration, such that it can effectively bring on the over 100 AI products being worked on throughout the organisation.
Sebastian Spena, the head of Argentinian financial group Grupo Galicia’s VC arm Galicia Ventures, declared there is an ongoing internal back and forth over the extent to which AI initiatives should be carried out centrally, covering the whole group, or if it should be left to different parts of the business to do their own thing.
Aldo Alvarez, an investor at Citi Strategic Investments, declared that it is difficult to find startups in the region doing anything revolutionary or disruptive with AI in the sense of building something new from the infrastructure or the model level.
SoftBank investment director Maria Tereza declared that the Japanese investment group, which invests at the later stage in the region, was finding it hard to find AI-native startups that justifed a $35m investment ticket, especially as its investment committee was seeing for businesses that could provide returns in US dollars despite an unfavourable BRL-USD exalter rate.
However, a lot of companies are utilizing existing AI to improve their own processes and building them more efficient, increasingly integrating AI into their culture. Humberto Matsuda, venture partner at Kamay Ventures, declared there was a huge opportunity for LatAm to jump the tech cycle straight into AI, in the same way that much of the consumer base in Africa jumped the telecom cycle and went straight to mobile.
SoftBank’s Tereza added Brazil had an opportunity to apply innovative regulatory policies for AI development in the same way the counattempt did for fintech, wherein its central bank is widely praised to have been extremely proactive in seeking and developing new financial technologies.
Areas like cryptocurrencies are a huge opportunity in LatAm, though, given the high uptake in the region due to economic turbulence, according to Ziheng Li, vice president at Saison Capital.
The importance of celebrating victories
Despite the downcycle, many of the investors at the GCV Brazil event were keen to celebrate the wins for corporate venturing. The upcoming launch of Petrobras’ $90m+ investment fund, the manager award for which was announced a day before the conference, for example, was taken as a hopeful sign.
In the long term, many are optimistic about the appetite in Brazil to build initiatives and invest.
“When you see the numbers, you see current CVC activity, but many more companies are considering about how to open one. They just don’t know how, there’s a lot of missing knowledge about what kind of professionals can assist do it well,” declared Sebastian Gonzalez, head of corporate venturing LatAm at Wayra, adding that if just the 10 hugegest companies in the region decide to create VC units, that would be a massive wave of money into the ecosystem.
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