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):



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…