Brazilian VC executives on what's the future for the sector. Image: YouTube

For venture capital firms in Brazil, the market is capitalized but investment criteria are tighter amid the crisis

Executives of Astella Investimentos, SP Ventures and Bradesco shared their thoughts on what might be the future of the VC sector post pandemic - and beyond

Logistics startup Cargo X has received an $80 million Series E round led by LGT Lightstone Latin America earlier this month. In the same week, pet products store Petlove raised $48 million from the Japanese conglomerate Softbank. Could these recent investments mean that the venture capital market in Brazil is immune to the pandemic’s effects on the economy?

That is not precisely the point. Deals like these being announced this month are most probably an outcome of older negotiations, pre-pandemic ones. On the other hand, businesses leveraging digital transformation in times of social isolation are catching the eyes of investors. “The real reflection of the crisis will come over the months of June, July, and August,” says Daniel Chalfon, partner at Brazilian VC firm Astella during a live transmission held by the innovation platform Distrito this Wednesday. 

The live panel also brought together other big names of the VC market in the country Eduardo Kupper, from Bradesco venture capital arm’s Inovabra Ventures and Francisco Jardim, founder at SP Ventures to discuss the future of the sector in Brazil. For the investors, the greatest impact of the crisis will be felt on late-stage rounds. “Companies that need to look for a B or C series this year should be ready to postpone it to the next,” Daniel adds. “Series B onwards still depends a lot on the international investor.”

During this year’s first quarter, the venture capital market drew more than $335 million in investment in Brazil, according to data from Distrito, pretty much in line with the $343 million raised in the same period of 2019. Kaszek, monashees, Astella: according to the three investors, the main VC funds in the country, those with a strong track record, are currently capitalized and will keep funding. What might change, however, is the criteria to address this money – that now is more likely to be tight. 

“At this time of crisis, the company needs to be more efficient, because there’s less revenue. Those firms that, before, were able to raise funding without having a certain substance, will have a lot of trouble at that moment because people will be more cautious.” For Eduardo, late-stage investments will also be largely affected. “When it comes to bigger amounts, it is impossible not to consider what happened in the public equity market. Sinqia, Totvs, Linx for instance, or even the bank [Bradesco] falling by 50%. There is no way to not take this into account to a company’s valuation and risk level: this is especially true when talking about larger series,” he explains.

Placed among the five major banks in the country, Bradesco is expected by analysts to report BRL 3.2 billion in profit for the first quarter this April 30, down 52% compared to the last quarter and 48.9% YoY.

It is clear that investments on marketing, for instance, will drop in the coming years, but what about, instead of disinvesting, migrating to formats that you have control of, that you control your base. There is a big opportunity for digital companies right now, perhaps it is a matter of reframing the operation.

Daniel chalfon, partner at Astella investimentos

Venture debt could be an alternative 

If it’s still unclear how this crisis will affect some industries in the mid and long run; for others, the impact is already being massively felt. “Whoever is dealing with retail consumption right now will struggle a lot […] especially those who need volume, omnichannel, D2C operations,” says Eduardo. 

WSJ reported on Tuesday that online travel giant Expedia was in talks to sell a stake to Apollo Global Management Inc. and Silver Lake. This Thursday, the company that has been devastated by the coronavirus pandemic confirmed it was taking an investment of $1.2 billion from the two private-equity firms. 

During crises, these equity deals, as well as full acquisitions such as the recent transactions closed by Apple – that have bought DarkSky and Voysis amid valuations drop – can put startups under pressure to close agreements that, on the one hand, can shore up their businesses, but on the other, wouldn’t happen in the first place (or would, but on different terms). 

“Venture debt is an important asset class for specific applications, it doesn’t replace equity, but it complements,” explains SP Ventures founder Francisco Jardim. “Certainly for a crisis, venture debt would be adequate: what makes it more challenging is the uncertainty of how long this crisis will last, but a venture-debt with 3, 4 years to pay in this crisis is better than selling a 10%, 20% stake of your company with ‘a gun to your head’,” he points out. 

“It’s really bad to do an equity round to increase runway [term to define how long your company can survive if your income and expenses stay constant]. At Astella we are not putting money from investors to save companies. What we have done is hold new hirings, hold investments, focus on cash flow […] extending the runway to more than 15/18 months is ideal. Venture debt is an interesting way to face the moment,” adds Daniel Chalfon. 

Telemedicine, YouTube lives, and ODL

While the health tech sector is on the rise as startups work to come up with services to fight the current pandemic; in Brazil, the answer could be relying more on innovating the way you do something, rather than on creating something brand new. Earlier this month, Rocket.Chat, a Brazilian open-source team platform partnered with Amazon to create a digital assistance platform for COVID-19. Through an AI bot, the multichannel platform manages to do teleconsultations through different channels, including Whatsapp, and Facebook.

In Brazil, it’s hard to see a company that creates something extremely innovative. It’s more about doing the same thing but more efficiently – and this is where VC is going to work on.

Eduardo Kupper, Inovabra Ventures

For Eduardo, it is during such crises that huge efficiency gaps appear. “Smart entrepreneurs will see these gaps – as we have been seeing on ODL, telemedicine, and live transmissions – and will target it, being able to fundraising.”

In the past weeks, Brazilian artists like Marília Mendonça, Gusttavo Lima and Jorge e Matheus – three of the biggest singers in Spotify in Brazil – made concerts on YouTube and broke all the records in the platform. Marilia has now the biggest Live video in the history of YouTube with more than 3.2 million concurrent viewers – all numbers that might drag the attention of audio platforms to expand their product. 

“It is the new tech-driven businesses that can change the country: they are the ones who are going to pay more taxes, foster more jobs, generate more money for investors. VC is one of the good solutions for Brazil,” forecasts Astella’s partner.