Opinion

What Brazil and US elections had in common – Facebook’s role

I moved to America at the end of 2014 to pursue happiness, not just for me but mostly for my family. Since 2003 I’ve been seeing someone I don’t support being elected for presidency in Brazil. In fact, I just realized that in my whole life just twice I voted for someone that got elected president. Being so different from the majority of the population is something hard to cope with.

My wife and I decided to leave Brazil as, after over a decade of bad policies in all areas we realized that things were not changing at a pace that could justify us to stay. Since we were kids we were “thought” that Brazil was the country of the future, like a sleeping giant that one day would wake up for its grandiosity. We thought that in 2012 that future was finally happening. Brazil’s GDP grew by over 7% that year, 30 million people got out of poverty as the country had a massive influx of people in the workforce and was surfing the wave of commodities, plus a massive oil reserve was found. The international recognition came as Brazil was picked to be the host of two major global events (summer Olympics and Soccer World Cup). The Economist cover featured the Christ Redeemer statue flying as a rocket. But a mere couple of years later the rocket was landing forcefully and everyone was bracing for impact.

This frustration proved to be too hard for me and my wife and we concluded that Brazil would never progress at a pace that anyone of my family could ever benefit from. As my great grandfather did while moving from Italy to Brazil back in the early nineteen hundreds, I realized I have one life to live and I don’t want to waste it in a country where people don’t agree with the way I think and don’t appreciate my contributions. I’m tired to do my best and see that it’s never enough to make a change. I voted, I paid huge taxes, all for nothing. I want to offer a brighter future to my kids and an environment where they can prosper and be free to pursue their passions and dreams. That’s my duty as a responsible parent.

Don’t get me wrong. I miss Brazil, I miss my friends and the stuff I know and I’m comfortable with. It’s sad that my Brazilian culture will not be fully passed on to my kids and will die with me. My references are different from yours. You know that joke you’ve been hearing since you were a kid? My jokes are all from the TV shows, folklore, lullabies I was exposed to when I was little in Brazil. My sense of humor is quite different from yours and I start seeing this with my daughters and their jokes. They are absorbing America’s culture and will have a different background than mine. Hopefully, I’ll be able to inject a bit of Brazilian influence but even the Portuguese language they are starting to lose.

As people who adopt children, my love for America wasn’t inherited – I picked America because I wanted to. Even though I’m also European and could move to Europe I believe in the American Dream. Despite all the difficulties, America is the place my wife and I chose to work, prosper, raise our kids. Is the place we want to get old and die. We had and have other opportunities but we left our comfort zone and moved to America because we believe this is the best place to live.

Have been experiencing frustration with presidential elections for almost all my life, I want to calm down my friends that are worried about Trump’s election. Guys, America is the best place on earth – has solid institutions, bright minds and an ever-boosting economy. America is much bigger than any person that may take the office. We will thrive. Always. We might zig-zag a bit but I truly believe we will always move forward.

My friends didn’t expect that Hillary wouldn’t be elected. Here in San Francisco Bay Are where I live, almost everyone is Democrat, supported Hillary and criticized Trump’s lack of concrete program and his personal behavior towards women and minorities.

That being said, even though almost all the media and all polls also didn’t anticipate Trump’s victory, I still think the surprise my friends felt was amplified by Facebook. Facebook’s immense scale makes us think that our activities inside its platform replicate our real lives but in reality, our virtual relations are dictated by how Facebook works.

You see, we all tend to live and have relationships with people that think like us. That’s why, if we can, we move to a neighborhood or city where we feel comfortable living close to people that are also like us. This is a conscious decision we make. In Facebook, we know that we invite friends to be part of our network and the posts they write are theirs. Again, most of our friends think like us so we see posts that in general share our own beliefs.

However, Facebook morphed to become a news aggregator and after a while, our news feeds started to show all sorts of, er, news and supposedly unbiased content. So if I liked the New York Times or Techcrunch, I can see in my news feed posts these outlets write about their articles. However, on a daily basis, I also find several posts citing articles from dubious sources being liked and shared by people the same way articles from reputable outlets. Plus, advertisers can target me as an audience that likes Techcrunch to sponsor a post about anything they want. Facebook then push these dubious articles as they generate engagement and or revenue. And the cycle goes on with people believing in stories without giving any thought on its veracity.

Political campaigns explore this Facebook flaw. As people don’t want and don’t care to fact check what candidates claim, we have all sorts of untrue, biased and dubious content being shared and propagated within Facebook. People that want to believe or already do believe in what is being shared get their beliefs reaffirmed. We pick friends that are trustworthy and thus we trust what they write and talk about. Facebook’s eager to generate engagement can cause us to mistakenly think that what is presented in our news feed is also trustworthy content, endorsed by our friends and mixed with content our friends write themselves.

Another problem with Facebook is that we believe we are discussing politics by writing a post and getting likes from our friends. Sorry to inform you that Facebook was never made to foster political discussions but, again, to generate post engagements and revenue (with engagement they can sell more ads).

I saw in Brazilian’s last presidential elections the same behavior I just saw again in ours. I couldn’t find a single Facebook post with contrarian view compared to mine. With the exception of my sister who has opposite political views in Brazil and a close friend here, all Facebook posts in my news feed were containing comments that I somehow already agreed with. My sister’s newsfeed was totally different, though: all she saw were posts from friends and media outlets she agrees with.

As a result, Facebook’s algorithm is creating polarizing echo-chambers. We believe we’re talking politics on Facebook but the truth is that we just engage with people that already share our current political views. By liking and getting likes on posts with our beliefs we just reinforce what we think. We now believe that everyone we know thinks like us and when we meet anyone that thinks differently it becomes an unpleasant surprise. In our minds, as so many people think like us that it’s not possible that we could be wrong. We are not prepared to discuss with people with contrarian views anymore. We don’t respect contrarian views anymore. We’re all becoming radicals and Facebook is partially responsible for that.

It’s time for us to wake up. We need to have a better place to discuss politics than Facebook. We need to appreciate the contrarian view and understand that people usually act in good faith and share the same end goal as us. We need to agree that although we might have different views, we all look for a brighter future. We need to find a way to listen to the other side independently from Facebook likes. Ultimately, we need to respect each other’s point of view, even if we disagree. As someone who moved to America to pursue happiness, I still believe that respect and honesty are inherent qualities of the American people. I hope with Trump we don’t become more radicals and we can coexist with different opinions. I hope to have made a good choice moving to America.

I’m not alone on criticizing Facebook. Read this article from Mashable and this one from Techcrunch  about Facebooks role in the US presidential election.

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Markets

Where are the Brazilian unicorns?

For the second time I came across the Wall Street Journal list of worldwide startups evaluated $1 billion or more. And for the second time I was disappointed – Brazil is not in the list.

See the list below (NOTE: I’m writing this article on April 21, 2014, so don’t be surprised if one or the other company joins or leaves the list):

Unicorns

Unicorns

Another important remark: search engines were not popular and Google itself had just been created. Perhaps some of you recall the newsstands with magazines showing Internet maps, with names and addresses of relevant sites!

Before we address the issue of why there is no Brazilian company in the list (neither South American, nor Latin American!) let’s look at the data in more detail.

Of the 46 startups, 36 are in the US, 7 in China and 3 in Europa. In other words 78% of the startups over US$ 1 billion are located in the US, 15% in China and 7% in Europe.

The total valuation sum of the startups in the list is US$ 129 billion, with 72% of that figure with the American companies, 20% with Chinese and 8% with European companies. The average startup valuation in the US is US$ 2.59 billion; in China US$ 3.64 billion, and in Europe US$ 3.47 billion.

Of the total funding of US$ 17.8 billion that the startups of the list received, on average, North American startups received US$ 355 million in 5.4 investment rounds. An amount similar to that in Europe (US$ 352 million), with the difference that in that region they are distributed in 7.7 rounds on average. In China, the average investment is US$ 570 million in less rounds, 3.8 on average.

Most of the companies were founded in the last decade, with an average startups age in the US of seven years, 10 years in China and 8 in Europe.

Classifying the companies by type, we reach some interesting conclusions:

  • E-Commerce is still sexy in China and in Europe but presently attracts few entrepreneurs and investors in the US. In China, 48% of the valuation is dispersed in 42% of e-commerce startups. In the US 7.3% in almost 14% of e-commerce startups.
  • Hardware is abundant in China: 39% of the total valuation is located in 14% of the startups producing hardware. In the US the proportion is almost 1:1 (around 16% for each criterion).
  • Neither Europe nor China have any relevant player acting on marketplaces but in the US the sector is extremely attractive with 23.5% of the total valuation in less than 14% of startups.
  • Software is also popular in the US, with 41% of the total valuation as compared to China, with less than 4%.

Important remark: there are regions that remain under the radar until negotiations are completed, with amounts that sometimes exceed billions of dollars. That is the ever more frequent case of Israel – Waze bought by Facebook for US$ 1 billion is a recent case.

Unfortunately, being under the radar is not the case of Brazil. In fact, we don’t have a single unicorn. We have some players progressing to that mark, such as Hotel Urbano, Dafiti and Netshoes. But this is little, very little for a country that has the fifth largest Internet population and the seventh highest GDP in the world.

The great Latin American case is ‘Mercado Libre’, originally an Argentine company, which consolidated the auction market in Latin America and made an IPO on Nasdaq. During the same period of consolidation of Mercado Libre, we had the success path of Buscapé, perhaps Brazil’s greatest case. I’m very proud to have taken part in that story, but deeply regret that dozens of other Buscapés have not appeared since then. Buscapé was sold in 2009 for about US$ 340 million and Mercado Libre today has a market value of around US$ 4 billion…

But after all, which are the reasons for Brazil not having not asingle unicorn? I have some hypotheses, which I construed during my 14 years in this market.

The Brazilian entrepreneur wants to make his nest egg fast. We grow with a lot of uncertainty and don’t stand a purchase offer when it could mean to have a relevant financial mattress. I’m sure that if Facebook had been created in Brazil, Zuckerberg would have sold it the first time somebody offered him a US$50 million check.

To really innovate requires assuming risks. And to assume risks requires big investments or of long-term return. The Brazilian investor already has a very unfavorable environment by itself and does not support additional risk. If risk was to be measured in a numerical scale, and the investor typically supports, let’s say, a risk of 10. Our economy is already responsible for 5, and then the other 5 are insufficient for really innovative sectors that would bring more beneficial fruits for the country.

If on one hand the macroeconomic environment already represents a high risk, the government still competes with the startups by offering high return with low risk (through treasury debt bonds).

Brazil have an incipient venture capital industry. We had hype from 2010 until 2012 but normally we have only half a dozen of active funds in the country. The unbalance between demand and supply makes the balance heavier for the investor, who can squeeze the entrepreneur most of the times. I already saw many contracts in which the investor has a drag-along on the founders, and when the time to divest (when the fund has to be closed to payback its shareholders), investors sells the company and carries the founders with him. Since the divesting period is not necessarily the optimal point for the company, the future of the business may be aborted before its heyday.

Startups require several rounds of investments during their life. Each round has a right size and investor. It’s what we call stage financing. In Brazil, we have very few angel investors, the type of investors who finance the first phase of the startups, when the business is beginning to take off.

In the US, a great number of entrepreneurs and former entrepreneurs become angel investors – people who made money building companies and now support other entrepreneurs. Here, since we have few success cases, there are few successful entrepreneurs and ex-entrepreneurs that could become angels.

In the US, there is a whole culture of value distribution between startup employees, who receive stock options. As the startups pick up value, many people benefit from it. These benefited employees, vested with resources, are able to set up their own startups and/or become angel investors for third parties. Here in Brazil, employees normally don’t want stock options and values only the salary (perhaps for the rush to make his own nest egg as explained above…).

There is actually no real limited liability company in Brazil. If the company goes broke, there is an enormous risk for the passive to be charged from the entrepreneurs and investors. In serious countries things are well separated and the partners are only called to cover the company passives after fraud is proven. This additional risk scares away entrepreneurs and investors.

The Brazilian fiscal framework is a big hindrance. In addition to the fact of having many taxes (without appropriate compensation, by the way), the system is extremely complex. We have dozens of taxes and obligations to fiscalize our suppliers (when we collect taxes). It is all something unthinkable for startups in the US. The ‘Simples’ regime would be interesting, but it doesn’t function for startups because investors usually are institutions – and it’s forbidden for companies to have institutional partners if they choose the Simples regime.

Labor burdens also fit in the framework described above. In addition of employees receiving 13.3 annual salaries, startups still have other heavy labor burdens on top of that from the tax legislation (CLT). Again such a tax burden is unthinkable in the US.

The Brazilian University is detached from the market. We have great researchers and a vast academic production. We could ask ourselves if the number of scientific works means quality of the works and my opinion is no – having in view that we have no single Nobel prize yet. Regardless of the discussion over quality, the truth is that few businesses come from the universities when compared to the US, for instance. In the US exists the so-called spin-off, that is, companies that were created inside of the universities, often with teachers in the partnership (and sometimes with the university itself), as was the case of Google, just to mention an example. Here, spin-off is treated as taboo in the academia.

To raise unicorns, Brazil need to improve the ecosystem as a whole and for that we would need a change on all stakeholders’ mindsets: Entrepreneurs, Investors, Big Companies, University and Government. Unfortunately, I believe the chances of doing that are too low…

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