Graphs representing the stock market crash caused by the Coronavirus
How is the pandemic affecting the VC ecosystem in Brazil so far. Photo: Shutterstock

With Silicon Valley deals on hold, what is the landscape for the Brazilian ecosystem?

"Investment funds specialized in startups are capitalized, and even during the crisis, they will continue to be. So the question now will be who to invest in," said the Executive Director at the Brazilian Startup Association to LABS

By now, you have probably noticed the gloomy effects that the global economy has been facing due to the corona crisis. Latin America, naturally, is no exception. ECLAC is revising its GDP forecast for the region to a shrinkage of 1.8% in 2020; Brazil, its first economy, has already announced emergency measures to inject nearly $30 billion into the economy, seeking to soften the blow from the pandemic.

While not one of the first sectors to be impacted, the startups and venture capital ecosystem is, even though, most likely to be affected by the economic turmoil – whether directly or through a cascading effect. At least this is what believes both experts in the country and global firms like Silicon Valley giant Sequoia Capital.

“Coronavirus is the black swan of 2020. Some of you (and some of us) have already been personally impacted by the virus. We know the stress you are under and are here to help. With lives at risk, we hope that conditions improve as quickly as possible. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out,” said a memo that the VC firm sent to founders and CEOs of its portfolio companies earlier this month. 

While the Brazilian Association of E-commerce found that some online stores have already registered an increase of more than 180% in transactions; supply chains, for instance, are being interrupted due to strong manufacturing sectors in the country that are now compromised.

If it’s still unclear what particular turbulence will hit each industry; for fintechs, the biggest impact may be on their growth strategy. “The financial market as a whole has been affected [by this crisis] and the figures that measure investors’ moods have been hit by sharp drops in the last two weeks,” Diego Perez, Director of the Brazilian Fintech Association (ABFintechs), told LABS

“In situations like these, it is common for investors, in general, to expect a stable scenario before making investment decisions, especially those who are exposed to a greater risk, such as venture capital investors, for example. This slowdown may affect the growth strategy of some fintechs, since venture capital investment is one of its great supports. However, we don’t expect a retraction, just a slowdown in growth,” he explains.

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For fintechs operating with credit lines to SMB – the main category affected by the productivity drop in the country – the major risk is to deal with a possible escalation of default rates.

“Some of these fintechs are cutting credit, closely watching limit increases and recalibrating operating costs in light of the new risk of default,” Fábio Neufeld, credit line leader at ABFintechs detailed to local newspaper Gazeta do Povo

Investment funds focused on startups are capitalized

For José Muritiba, Executive Director at the Brazilian Startup Association (ABStartups), the moment is full of instability and uncertainty, but funds are currently capitalized. “In Brazil, investment funds specialized in startups are capitalized, and even during the crisis they will continue to be. So the question now will be who to invest in, because the money exists,” he said in a statement to LABS.

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“I don’t see too many term sheets being issued in the next two to three weeks until there’s more clarity. It’s certainly drying up,” said Ryan Gilbert, general partner at Propel Ventures. If in Silicon Valley, many venture capital and private equity deals are being put on hold until uncertainty around the pandemic clears up, in Brazil, the situation is more delicate for larger startups, since they need to raise higher rounds – usually from international investors.

“The work (for startups in early stages) continues, whoever has a deal to announce will announce in the coming weeks,” said Daniel Chalfon, partner at Astella Investimentos to the Brazilian magazine Exame. “Companies need to exercise extra caution with their cash. It may not be appropriate to raise a new round in the next twelve months.”

But even with global experts such as Sequoia ringing a bell for the setbacks to come, past crises have previously shed a light on (near) future opportunities. “I have no doubt that startups will come up with relevant solutions during and after this moment,” emphasized the Executive Director of ABStartups. Who remembers Google and PayPal during the dot-com crash, and the rise of Airbnb and Stripe amid the financial crisis of 2008? 

Considering the scenario of social lockdown, we started an intense debate on how the digital and tech market – in a nutshell, startups – gain prominence and prove to be a good solution for several segments, since they become, if not the only, at least the main communication path, sales channel and delivery of real value to customers in more traditional markets,” Muritiba pointed out. “In this environment, there are several opportunities for startups and it is in these scenarios that they know best how to operate, with lean teams, low costs, agility, and potential path of success for businesses that, before, didn’t live in the digital universe.”