ArpexCapital

Dream, People, Culture

The Mobile Revolution: Brazil

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I am Anthony Hurtado an American intern at ArpexCapital. Prior to joining ArpexCapital I lived in São Paulo, Brazil where I briefly studied at PUC-SP while interning at Raymond James & Associates.   Currently, I am a student at Georgetown University.  I will periodically contribute to this blog.

In the US and European ecosystem, a “mobile” revolution, driven by smartphones, is underway. It is unclear, however, whether the same mobile revolution will occur in Brazil: 82% of the Brazilian population uses pre-paid chips in place of mobile plans and Brazil is the second most expensive place for someone to use a cellphone, due to layers of taxes and fragmented industry fees.   If you were to look at the decision by Pontomobi, Brazil´s largest mobile marketing company, to bypass Mexico and Argentina and instead expand into Europe due to their more advanced tech infrastructure, you would probably conclude that Brazil’s current boom won’t include mobile.

Nevertheless, I have found many reasons to believe in an imminent Brazilian mobile revolution. The chief reason is the Brazilians themselves.  In the land where a new iPhone costs anywhere from 2.5-12X more than in the US, sales are up!  The new Class C in the last eight years has increased general consumption nearly seven times over.  Mobile phones and other tech products make up a significant portion of this new consumption.  App-heavy, Android-based phones are the country’s fastest growing cellphones. Despite having sky-high tariffs on smartphones, smartphone sales are up 85%! In the overtaxed mobile environment, 15% of Brazilians already have a smartphone.  By 2014 that number is expected to be 45%.

Moreover, while there is an endless amount of legislation and regulation of cellphone minutes, ubiquitous promotions by telecom carriers greatly minimize the actual costs incurred by many Brazilians.  These promotions already include the mobile Internet space as seen in, e.g., TIM’s latest promotion of a month’s free Internet when you buy a TIM pre-paid phone.

The question is not whether Brazil will experience the mobile movement but which Brazilian companies will do the best job of harnessing it.  With this in mind, Pontomobi´s Europe play now makes sense.  It is not that the company is abandoning Brazilian mobile marketing, rather they´re preparing for its next stage, which is currently being realized elsewhere.  Their move to the developed markets demonstrates that the Brazilians who progress Brazil´s mobile sector to its next stage may not be in Brazil right now. They will return to Brazil and the mobile revolution, when it hits Brazil, and will combine many European and American (and Asian) lessons with indigenous business and technological standards.   

It’s coming: the worldwide mobile revolution will soon hit Brazil, The Country of Tomorrow Today.

June 4, 2011 at 14:33 Comments (7)

Some Tips for Gringos

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I once got advice from a successful businessman in Rio Grande do Sul: Leave business in Brazil to Brazilians.
 
I haven’t taken his advice, although there is a lot of wisdom in it. I guess I like to do things the hard way and, anyway, since I love Brazil and my wife and kids are dual citizens, I’m involved in this country no matter what.
 
The businessman’s point, however, is well-taken: business in Brazil is indirect, complex and multi-layered. Each of those layers represent ways to lose money. 
 
Some Gringos ask, “Can’t you just get a good lawyer to navigate?” Not really. You need a good lawyer, yes, but you also need a good and honest business partner, a good and honest accountant and a willingness to be present and vigilant yourself.
 
Few people can find that combination, which makes doing business here highly risky. On the other hand, for those who do find those resources, their businesses operate in a fertile market with high barriers to entry.
 
Even if one overcomes the bureaucratic/structural challenges to doing business in Brazil, however, cultural differences present a persistent challenge.  So I am going to highlight a few historical/cultural differences that may help Americans to better understand Brazil and vice versa. (Unfortunately, since I have not done business in other than those two countries, I cannot include, e.g., Europe and Asia in the comparison).
 
·      Both the US and Brazil are immigrant countries but the two “melting pots” have produced different cultural outputs.  
 
Anglo-Saxon religious refugees founded the US, while Portuguese monarchs founded Brazil. The former brought Protestantism, capitalism and a suspicion of centralized authority – religious or governmental – to the US. The latter brought a strong Catholic culture, suspicion of individualism and profit-seeking, and centralized authority to Brazil. 
 
These differences remain important. In Brazil, businesspeople, even young entrepreneurs, must overcome societal suspicion of individualism and profit. In the US, businesspeople and especially entrepreneurs get cultural support, often to the point of hero worship (see, e.g., Steve Jobs and Mark Zuckerberg).
 
Anyway, don't flaunt wealth, or a desire to attain it, in Brazil. A little humility goes a long way.
 
·      Despite historical differences, the popular cultures of the two countries have converged. 
 
American movies, TV, music and even sports are extremely popular here.  I am still, after many years, surprised by the pervasiveness of US pop culture in Brazil.
 
At the same time, Brazilian culture has increasingly strong influence in the US. For example, Brazilian cuisine, sports, fashion (and fashion models) have a strong cache in America right now.
 
More generally, both countries have strong “consumer cultures”, both are heavy online and mobile users and both are early-adopters of new technologies.
 
These cultural similarities between the US and Brazil have a big impact on venture capital, as a given startup can potentially address the market in both countries (see, e.g. Foursquare) . In addition, a business idea in one country can be cloned in the other (see, e.g. Peixe Urbano).
 
At the same time, a business in one country can fall victim to a competitor from the other (see, e.g., several Brazilian startup competitors to LinkedIn that will not survive). Keep that in mind and check to see what competitors in the other country are doing.
 
·      In Brazil, historically, the far left is seen as a liberator, the right as a threat.  In the US, the far left is seen as the greatest threat.
 
To be honest, I am not sure how to draw the direct connection between this point and business, much less venture capital but I feel it is deeply important to understand.
 
Many Brazilians have not forgotten that, during the Cold War, the US often aligned itself with brutal right-wing dictators in Latin America; a lingering resentment remains and can easily be connected to a separate perception of Americans as arrogant and spoiled.
 
On the other hand, most Americans believe we fought the Cold War, at the risk of nuclear annihilation, to preserve liberty against a totalitarian ideology.  For many Americans, seeing a hammer and sickle on political campaign commercials (which happens regularly in Brazil) is equivalent to seeing a swastika.
 
This divergent political history heavily impacts the relationship between Brazil and the US and between individual Brazilians and Americans.  I guess I hope that, by understanding our mutual histories – why we think the way we do – Americans and Brazilians can sympathize with each other and overcome differences.
 
More generally, by understanding basic cultural similarities and differences, we can do business more successfully with each other.
May 23, 2011 at 06:53 Comments (4)

Three Reasons for a Golden Age in Brazil

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In the US, from 1994-1999, the Internet drove the “the greatest legal creation of wealth in history," according to John Doerr of Kleiner Perkins.  
 
Another wave of historic wealth creation is underway, this time in Brazil. Increasing broadband penetration, smartphone usage and new entrepreneurs are three primary reasons why.
 
First, broadband. In 2010, less than 20% of Brazilian households had broadband. The Brazilian government’s National Broadband Plan (PNBL) aims to connect 72% of all households to broadband by 2014.  If the PNBL achieves even 40% penetration in three years, it will bring a tsunami of new consumers online and create a wave of opportunity for entrepreneurs.  
 
Second, smartphones.  As of early last year, the Brazilian smartphone market was growing at four times the pace of the world average. More importantly, socioeconomic class-C and -D shoppers were driving the growth with respective penetration rates that reached 11% and 4%.
 
“Broadband” and “smartphones”, of course, relate to each other: telecom operators now sense an opportunity to provide mobile broadband services to households that never had fixed internet connections.
 
But smartphones also enable a whole new universe of innovative businesses (apps, anyone?) that have mobility and geo-location at their core. 
 
Third, entrepreneurs.   When I began doing business in Brazil, people constantly warned me that Brazil did not have good entrepreneurs. I never believed it, because from the first day I stepped on Brazilian soil in 1999 I saw entrepreneurs navigating crushing inflation, paralyzing interest rates and confiscatory taxes to build successful businesses.
 
What did concern me, however, was the number of entrepreneurs. If there are only 30 entrepreneurs starting companies in Sao Paulo and Rio de Janeiro, we are all in trouble. A sustainable venture ecosystem needs depth as well as quality.
 
It’s like Brazil’s soccer program – at the bottom of the pyramid, new players of all ages from all locations constantly enter the system. They compete intensely for years and, eventually, the best players reach the top of the soccer pyramid. The result is a national team that has qualified for every single World Cup and has won five of them, more than any other country.
 
A venture ecosystem is like that, too. It needs a wide and deep pool of entrepreneurs at the bottom to achieve an Apple, Google and Facebook at the top.
 
Based on statistics and, moreover, on anecdotal evidence from universities, meetups and social media, I’m convinced that Brazil finally has that. 
 
We are in a golden age for venture capital in Brazil, driven by broadband penetration, smartphones and a growing number of entrepreneurs.
May 7, 2011 at 08:17 Comments (2)

A Good VC Deal is Obscene, Part II

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All VCs have a targeted proflle for investment – stage, size, industry, etc. As mentioned in a previous post, however, VCs reject the vast majority of deals they see, even if those deals fit their investment criteria.

 
That’s because a good deal is difficult for a VC to pre-define. Investment decisions derive from intangible factors and the VC's intuition as much as from concrete analysis.   A good VC investment is like obscenity:  you know it when you see it.   You also know when you don’t see it.
 
A previous post dealt with the characteristics of an investible team. This post addresses timing, expertise and the deal itself.
 
Timing
 
A good idea that is too early is a bad idea. A good idea is that is too late is a bad investment.
 
How do you know if a business is early, late or right? It’s often an intuitive call but if, for example, a rash of similar startups already launched and have a head start of nine months or more, it’s probably late.   (Of course, if you can make a huge improvement over an existing company, it’s never too late to enter the market.)
 
On the other hand, if no business similar to yours exists, it raises questions as to whether you are too early.  Specifically, WHY do no similar businesses exist? Ideas are commodities – if you have a great idea, at least five other people have the same one. If there is no comparable business in your market, maybe the market isn’t ready for your type of business.
 
Yes, entrepreneurs sometimes invent brilliant, non-derivative business ideas but these are the exception, not the rule.  
 
In summary, good deals tend to come at the cutting edge of a trend but not before one.
 
Expertise
 
A VC can often dispense with the subject of timing if the entrepreneur and his team know their vertical deeply. 
 
For example, if Jack Dorsey pitches a mobile business, does an investor need to worry about timing? Not really.  Dorsey knows the state of his market better than anyone. Nor does the investor need to worry about technical hurdles, team, competitive analysis, etc.
 
If an entrepreneur with no background in mobile pitches the same business, the situation has more friction: now, the VC needs to verify every assertion the entrepreneur makes. What are the technical hurdles for the product? Is the market ready (is he too early)?   What is the competition doing (is he too late)?  Can he build a good team (who does he know)? Etc.
 
Entrepreneurs with deep subject matter expertise make deals feel right. Lack of subject matter expertise makes deals uncomfortable, even if the entrepreneur has a good idea. 
 
Deal Problems
 
Sometimes the administrative aspects of a deal, apart from the entrepreneur or business idea, create too much friction. 
 
David Lerner has a thorough list of commonly-encountered deal problems but, for example, no investor likes to see a complicated cap table. 30 investors, multiple classes of shares, strange option agreements, etc. will bring a lot of trouble in the future.
 
Similarly, no VC wants to inherit legal issues – an angry ousted co-founder, violations of non-competition agreements, tax liabilities, etc.
 
Finally, an over-shopped deal makes investors uncomfortable. It may not be fair but, if a company looks for an investment and doesn’t close after 9-12 months, outsiders assume something is wrong with the company.  Often, there is a good explanation for why no investment has been made. If so, the entrepreneur should just explain the situation clearly and honestly – but know that new investors will feel skeptical.
 
This brings up a final point: even deals with problems can get done IF the entrepreneur communicates about those problems in a proactive, honest way.   “The truth always makes sense,” so just say it.
 
On the other hand, if the investor senses that the entrepreneur is hiding something, it will destroy the deal and hurt the entrepreneur’s reputation.
 
Conclusion

It would help everyone if VCs could predefine exactly what they wanted to see in an investment opportunity but it’s not possible. The characteristics of an investible deal involve intangible factors and the VC’s intuition as much as the hard “investment criteria” listed on fund websites.
 
When it comes to a good VC deal, like a lot if things in life, you just know it when you see it.
 
May 2, 2011 at 12:21 Comments (0)

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