ArpexCapital

As discussed last week, 2011 was an amazing year for venture capital in Brazil.  What will 2012 look like?  The list below has some predictions:

• More Investors.  I estimate that, in 2011, the number of VC investors in Brazil grew 3x and the number of entrepreneurs 3-5x over 2010.  Amazing growth.  In 2012, the number of investors (and entrepreneurs) will at least double (2x).  Also amazing but it will result in more investors than the ecosystem needs right now and, therefore, the position of good entrepreneurs with good ideas will grow even stronger.  For investors, it will mean more competition for deals and will likely drive valuations higher — higher valuations mean lower ROI.

• Reality Begins to Bite.  In 2012 the market will begin to bump its head against the ceiling of reality; good times will become challenging times for many companies, e.g., some funded companies will begin to struggle and may not be able to raise follow-on financing.  This is already occurring in the US, where many of the hundreds of companies that received funding during the super angel boom now cannot raise Series A financing.  On the other hand, just as in the US, successful companies in the Brazilian market will raise capital easily and at high valuations.  

• Bubble.  The beginning of challenging times will not stop the flood of funding and new startups and, by the end of 2012, the Internet space in Brazil will be in a bubble.  By "bubble", I simply mean that many companies will have received funding despite not being viable businesses and valuations will have reached levels that do not make investment sense from a risk/reward perspective.  This is not necessarily bad — it's not good, either — it just is.  Ecosystems don't evolve in a straight line upward, they grow by taking two steps forward, one step back, by "fits and starts", as we say in the US.  Two years ago, most people thought VC in Brazil was a can't-win proposition, now people think it's a can't-lose proposition and they are pouring into the market.  The market is somewhere in between and the will need to re-balance as best as possible over time.

• We Get Better.  One of the benefits of challenging times is that they force entrepreneurs and investors to be better.  I think 2012 will see the best startups and entrepreneurs hone their businesses, grow in sophistication and mature into viable long-term enterprises.  Same for investors.  That's great for the future of Brazil.  

• Mobile Tsunami.  Regarding predictions for what will be "hot" investment sectors, I have various verticals in mind but one dominate theme is mobile.  The cloning of businesses in Brazil has become a science but at times the focus on cloning distracts from the larger trends.  A mobile tsunami has hit the US and the US startup world has responded with a slew of "mobile-first" businesses, i.e., startups that only make sense as mobile business, rather than startups that are web-based with a mobile strategy.  For the most part, the same has not yet happened in Brazil and I see it as an opportunity for good entrepreneurs.  The same mobile tsumani will hit Brazil — I don't care what the doubters say — so it's a good idea to get there first with innovative businesses.

Last week I was one of many speakers at a BRNewTech event, the meetup organized by Bedy Yang, Flavio Pripas, IN Hsieh and Marco Fisbhen.

Each of us were asked to speak about 2011 and make predictions about 2012.  Below are my notes about 2011:

• Kudos to Bedy, Flavio and Marco for creating BRnewTech — it is not the only startup community in Brazil but it is the biggest.  It serves the critical role of providing community for entrepreneurs, investors and other members of the ecosystem here.
• Honestly, things changed so much and so rapidly in 2011 that it is hard to remember 2010.  2009 is a distant dream.  As recently as 2010, many people questioned where there was a place for venture capital in Brazil, in part because they questioned whether there were enough entrepreneurs.  That now seems like a ridiculous concern. Anyway, 2009 and most of 2010 was about private equity.  2011 has been about venture capital.
• I estimate 3x the number of investors and 3-5x the number of entrepreneurs in the market this year over last year.  That's incredible.
• 2011 marked the year that the Brazilian ecosystem completely integrated with the American ecosystem — prior to 2011, they were two distinct ecosystems, now investors and entrepreneurs overlap in a very thorough way.
• 2011 was the year of the clone.  In prior years, many businesses were similar or derivative to businesses in the States but they were organic/native to Brazil.  In 2011, most new businesses were exact copies of businesses in the States or Europe.