RIO DE JANEIRO, BRAZIL – Investments in startups in Brazil in 2021 have once again broken records. There were US$9.4 billion injected into the Brazilian innovation market, almost 2.6 times what was raised by companies in this segment in 2020, US$3.5 billion.
The data were collected from Distrito, an innovation platform that monitors the sector.
The billion-dollar figures confirm what has been the rule in the Brazilian startup market over the past 10 years: since 2011, the only time investments fell was in 2016, a year of acute economic crisis amid the impeachment of President Dilma Rousseff (PT).
Last year, a combination of factors propelled the innovation ecosystem to this positive moment.
In Brazil, investors looked at the Stock Exchange and saw gloomy figures for weeks on end: the drop was almost 12% year-to-date. Fixed income securities, in many cases, yielded little – as a result of the Central Bank’s policy of stimulus to the economy during the pandemic, when the institution froze the SELIC rate at 2% for 7 months.
A similar decision by the Fed also prompted U.S. investors to look into the real economy. In a saturated market, which is already based on technology companies, many of them placed their money in countries of the global south, such as Brazil – which, with the dollar above R$5, was cheap.
Everywhere, demand for technology grew. Meetings began to demand videoconferencing apps, restaurant visits became deliveries, and medical consultations began to be conducted through telemedicine, when possible. The expectation for technology investors was that the change in behavior driven by social distancing would turn into profit.
This was the observed result: entrepreneurs going public in Stock Exchanges, seeing lots of money going into their businesses, and starring in mega investment rounds. Proof of this is the herd of unicorns born in Brazil.
There were 10 technology companies exceeding US$1 billion in market value throughout 2021, which usually happens in fundraisings involving a few million dollars.
The oldest unicorn, Nubank was the star of the year among Brazilian fintechs. Valued at US$41.5 billion, the digital bank debuted on the New York Stock Exchange in early December. Like other IPOs, the achievement is a showcase for Brazil and becomes a magnet for investments.
However, since late last year, the scenario has been changing. Although the market continues to grow, as experts point out, the frenzy may have a time to end.
The liquidity seen by the stimulus measures prompts discussions about a financial bubble. Nubank itself had to cut US$10 billion from its initial offering amid a drop in fintech stocks worldwide.
“There is a current cycle that is different from what we experienced last year,” says Distrito co-founder Gustavo Araujo.
He realized that the winds started to change at the end of last year. “As we started to approach greater global instability, investors became a little more rational and raised the bar a little higher,” he says, in reference to the new wave of infections caused by the Omicron variant that led to flight cancellations and travel restrictions.
At the same time, the Fed announced that it would start to gradually reduce its bond-buying program – a measure that follows the same line as Brazil’s Central Bank, which, in March last year, dismissed the rate at a historic low and began to raise interest rates.
“There’s no way we can keep growing as much,” Araujo says. “At some point, investors who went through this whole journey and multiplied their capital for 2 years, since the start of the pandemic, need to make a profit and take their money out.”
The trend is that capital will still be reallocated to the technology market, but to companies that are more secure than startups-such as energy startups, for instance, which in many cases have 30-year concessions. Overall, the yield is lower, but it is secure.
“It is only natural that you balance your portfolio by looking for more stable companies. Are these companies going to grow and offer a huge return? No. But these companies don’t run the risk of losing as much value,” the entrepreneur says.
Mature rounds, such as B, C and D, should also be rare. Dependent on higher checks, they are more affected by economic shocks.
Despite the “very complicated” economic conjuncture, as Araujo argues, the investment scenario in Brazil will not be a desert. Everything suggests that the digitalization driven by the pandemic is here to stay and this market will not shrink. Startups that are able to turn a profit will be rewarded.
Another figure that is not expected to slow down this year is that of mergers and acquisitions. This type of business took a leap last year.
“This mentality of going abroad to find what you don’t have and lack happened in 2020, but it greatly accelerated in 2021,” Araujo says. “We don’t think it will slow down in 2022, not least because any discount in the market value of technology companies means that good assets can be bought at lower prices.”
“Whoever invested in 2021 is not thinking of a return on capital in 2022 or 2023, but in 2031,” Araujo says, recalling that cycles typically run from 8 to 12 years. “In publicly traded capital you buy the rumor and sell the news.”
“When you invest in a startup, unlike a stock, you don’t have liquidity, so you can’t sell your stake the next day. You are locked into that asset until it performs,” he says.
Financial market shocks may hit the innovation sector like a tidal wave, but startups are not exempt from potential impacts, even more so with elections in the horizon.
“It’s a year of greater instability, volatility. Until there is a definition of who may win or who will run, the year is unstable,” Araujo says. “And investors don’t like instability, so they leave.”
In short, “the technology market runs in a parallel lane, but it’s the same pool. If the pool dries up, it dries up for everyone,” he explains.