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August 9, 2019

An Entrepreneur's Guide to the Brazilian Startup Ecosystem, SoftBank leads $231M investment round for Creditas, Lessons from Leaders in Latin America’s Retail Banking Market, and more from LatAm…

An Entrepreneur's Guide to the Brazilian Startup Ecosystem

Brazil has undergone an impressive economic transformation, as demonstrated by Forbes’ 2012 article naming Brazil “one of the most entrepreneurial countries in the world”.

Back in 2000, Brazil’s GDP was ranked around 11th in the world at approximately $655.5 billion. Today Brazil stands in eighth place at roughly $2.5 trillion.

According to Next Web,

“As the largest country in Latin America, startups in Brazil have access to a market with one of the highest levels of mobile saturation, a wide range of investment options from local and international Brazil-centric funds, and support from a government that has made driving business growth one of its key priorities.”

President Bolsonaro’s election has jumpstarted Brazilian financial markets; as investors’ confidence has been buoyed by the President’s promises to deliver hard-line economic reforms, tackle corruption, and reaffirm Brazil’s position as a global powerhouse with his pro-business agenda.

Over the last few years, Brazil has shot ahead in the region for VC investment. Between 2017 and the first half of 2018, the country secured a total of $1.4 billion, or 73% of Venture Capital investment dollars.

As stated by TechCrunch, Brazilian startups have the ability to scale quicker than in other neighboring countries. Notable startups like Creditas and Loggi have raised $100 million+ series D rounds less than fours years after raising series A funding. Meanwhile, real estate startup LYX, who connects land-owners with builders and buyers, has its sights set on an IPO this year.

São Paulo, the nation’s cultural and financial hub, is the first stop for any entrepreneurs looking to Brazil. As basecamp to more than 2000 startups, the city is is estimated to bring in more than 60% of startup capital nationally.

As home to roughly 12 million people- accounting for over 30% of the country’s GDP-,  São Paulo is Brazil’s “unrivaled powerhouse of innovation”. The city has the most developed startup ecosystem in the country. Spotify, Airbnb, Google, Netflix, and Amazon are all in business here, alongside homegrown unicorns like Nubank and Quinto Andar.

According to Jonathan Moed of Forbes, what is notable is not only the sheer number of people in cities such as São Paulo and Lima, but it is the population density relative to the population in the rest of these vast countries that enables companies to focus their operations on a relatively contained area.

SoftBank leads $231M investment round for Creditas

Creditas, a Brazilian lending platform, has reached a $750M valuation after a new $231M investment round led by SoftBank.

Creditas specializes in loans that carry lower interest rates than traditional banks.

Akshay Naheta, Managing Partner of SoftBank Investment Advisers, and Adviser to the Vision Fund, stated “while there is huge demand for consumer lending in Brazil, the market is inefficient”.

This capital infusion will help the lending platform expand their product portfolio, improve their technology, and start to offer payroll loans– a market practically untouched by banks.

According to Reuters,

“Part of the proceeds will be used to expand elsewhere in Latin America, starting by offering asset-backed credit in Mexico later this year. In Mexico, domestic credit provided by the financial sector equals 54.5% of gross domestic product, far below the 114% in Brazil, according to the World Bank.”

Sergio Furio, Founder of Creditas, said that the platform’s revenues will likely expand thirty-fold by 2021, but declined to disclose actual figures.

“In the future, loans will be more than money, they will be part of a full solution offered to clients,” Furio stated.

AMLO Fear Factor: Corporate Mexico Is Too Confused to Invest

Eight months into his six-year term, President Andres Manuel Lopez Obrador appears to be making good on his vow to slash exorbitant costs within the Mexican government.

He repeatedly insists that corruption is no longer tolerated at the upper levels of bureaucracy, and has vowed that the savings from his austerity measures and crackdowns on corruption scandals such as fuel theft will be “showered on the most needy citizens” (Bloomberg).

Most of the business executives do not mind these measures, however. Instead, their objections lie with AMLO’s unsteady track record when it comes to construction projects and recently signed contracts that are being reworked or dismissed all together. Within this backdrop, there is no confidence and therefore no one is investing; and many business executives see this as the beginning of a downward spiral.

According to Bloomberg,

“Gross fixed investment fell 7.4% in May, the lowest monthly reading in more than two years.”

AMLO’s austerity ambitions combined with the uncertainty of business leaders is impacting the Mexican economy in a notable way.

While Mexico narrowly avoided a recession when preliminary second-quarter growth data was released last week, its expansion has slowed considerably. The Mexican government has cut its growth forecast to 1.1%, while Bank of America and Citibanamexhave cut theirs to a mere 0.5% and 0.2%, respectively.

Photo Courtesy of Bloomberg
“Volume at the already sleepy stock market is drying up and some companies are even considering a delisting or moving the publicly traded shares to another country. The IPO pipeline is nearly empty and debt deals are mostly around rolling over maturities rather than investing in new projects”(Bloomberg).

Cult-Favorite Topo Chico Breaks Out of Texas With Help From Coke

Two years ago, Coke acquired Mexican Topo Chico for $220 million: a bet that the brand can help the beverage giant ward off rival Pepsi as both companies navigate the shift away from sugary drinks. With the sparkling market in the United States attracting more and more customers, Topo is getting pushed into the spotlight.

“Coke typically uses its vast distribution network to blanket the U.S, and just about everywhere else on earth, with beverages that range from Diet Coke and Powerade to Smartwater and Minute Maid.  When it comes to Topo Chico, the challenge is preserving the local vibe and Mexican heritage that gives the brand its cachet with consumers (Bloomberg Business)”.

Topo’s expansion comes as Pepsi’s new sparkling water, Bubly, has rattled the market since it launched a little over a year ago, part of an all-out assault on LaCroix.

Photo Courtesy of Bloomberg Business

James Quincey, Coke’s Chief Executive Officer, recently cited the brand’s “fantastic growth rate”, stating that it was helping to boost the company’s overall portfolio of premium water brands. As soon as next year, Topo Chico sales in the United States could pass Mexico (Bloomberg Business).

Data Rigging is Latest Chile Salmon Farm Scandal

A salmon-farming company named Nova Austral has been quick to point out that its salmon are antibiotic free. According to the Los Angeles Times, antibiotics-free salmon can fetch premiums of as much as 30% over in international markets.

Last month, an investigative report published by local newspaper El Mostrador published that Nova Austral “had misreported its fish mortality data to regulators. Its salmon were dying in alarming numbers that had been hidden from the public” (Los Angeles Times) .

A number of scandals have hit the booming Chilean salmon industry in recent years, such as the incident in which 900,000 fish escaped into the Pacific and the time an algae bloom (that environmentalists attributed in part to salmon farming) wreaked havoc on the Chilean coastline. There’s no suggestion that Nova Austral sold diseased fish to retailers, but, this incident has touched a nerve in Chile — which produces about 25% of the world’s supply — in a way that those other incidents did not.

Regulators are pressing civil charges and members of Chilean congress have called for tougher regulation, while Nova Austral’s top executive, Nicos Nicolaides, was abruptly pushed aside. The price on the company’s foreign bonds plunged to as low as 60 cents on the dollar.

This incident highlights another growing trend at a time when organic and green are all the rage among the world’s well-heeled consumers: The temptation to cut corners and to give products a veneer of sustainability is great, a practice called greenwashing.

“…While Nova Austral may not have been greenwashing in a strict sense — the fish are, after all, antibiotic free — what it did is a direct relative of it: faking the data to make their organic product look greener than it actually is.”

The salmon industry has long been riding the health trend. Demand grew an average 4.5% annually in the decade ending 2017: faster than that for poultry, pork or beef.

Chile, second only to Norway in producing the most salmon, has benefited, with exports more than doubling over the last decade, totaling $4.7 billion last year.

“Salmon is Chile’s top export outside of mining and, with double-digit growth in the last three years, is seen as key to diversifying an economy that has been stuck in slow growth and overly reliant on copper production.”

McKinsey Report: Lessons from Leaders in Latin America’s Retail Banking Market

Over the past several years, Latin America has become the fastest-growing banking market worldwide.

While performance of the surrounding global banking industry has experienced moderate growth and profits, LATAM banking has proven to be an exception.

According to McKinsey Global Banking Pools data,

“Between 2012 and 2017, banking revenue before cost of risk in the region grew at a compound annual growth rate of 12 percent in constant 2017 exchange rates, reaching $418 billion. This is six percentage points higher than the global average and more than any other region.”

Various factors contribute to this rapid growth.

Notably, Latin America has very low banking penetration compared to the rest of the world. In several LATAM countries, only 30 to 50 percent of the population over age fifteen have an account with a financial institution, compared to more than 90 percent in countries like the US, UK, or Spain, and roughly 80 percent in China.

Additionally, Latin America has a young and growing population, which contributes to faster growth.

McKinsey expects Latin America to remain the growth leader in banking through 2022, and will continue closing the gap in banking penetration, with revenues increasing at around 10% per year over the next five years; reaching $675 billion before cost of risk (see below).

Photo Courtesy of McKinsey

Retail banking has been the center of growth for the region; outperforming wholesale by two percentage points and growing at a rate of 12.6% from 2012 to 2017.

“Within retail, consumer finance has been the primary growth engine, and remains the most developed banking submarket in the region, representing more than one-third of after-risk revenues. However, in relative growth terms, microloans, deposits, and retail payments are the fastest-growing submarkets” (McKinsey).
Photo Courtesy of McKinsey

McKinsey expects retail and wholesale banking to grow at rates of 10.2 and 9.8 percent, respectively, through 2022, with consumer finance and mortgage as the primary drivers of retail growth.

Latin America is the global banking industry’s most profitable region.

Overall return on equity (ROE) in 2017 was 14%, outperforming other global regions and more than doubling the 4–6 percent range of most developed regions.

“Revenue is the primary factor in the region’s outperformance: interest margins over assets stood at 4.9 percent in 2017, 1.8 percentage points above the closest regions, and fee margin over assets at 1.3 percent. Latin America’s profit advantage is negatively offset, however, by its lower cost efficiency, with operating expenses at 3.9 percent of assets (1.5 percentage points higher than the next-closest region), and its poor asset quality, with provisions at 1.1 percent of assets.” (McKinsey).

National leaders- or banks with total assets of more than triple their market average- are the obvious winners in terms of average profitability levels, with a combined ROE of 15.2%. Large banks- with total assets between the market average and three times the market average- and medium banks- with assets of from one-quarter of the market average, up to the market average- are next at 13.6% and 13.1% ROE, respectively.  While national leaders depend heavily upon efficiency, large and medium banks rely on revenues and asset quality; with “a significantly lower provision ratio” than national leaders and small banks.

Latin America’s small retail banks- having assets less than one-quarter the market average- are the least profitable among the size groups, with average ROE of 3.9%, significantly below the cost of capital. This performance is driven by low return on assets (ROA) and a lower-than-average leverage ratio. ROA is significantly hurt by inefficient cost structures and asset quality.

View the full McKinsey report here.

Toyota’s Plans to Move LATAM Headquarters to Argentina

Takeshi Uchiyamada, Head of Toyota Motor Corporation, has announced that the company will transfer the operations of its Division for Latin America and the Caribbean (LACD) from Japan to Argentina, will generate new jobs in the country.

President Mauricio Macri welcomed Mr. Uchiyamada at the presidential residence in Olivos, where the head of state was joined by the Minister of Production and Labour, Dante Sica. The company’s CEO for Latin America and the Caribbean, Masahiro Inoue, and the head of Toyota Argentina, Daniel Herrero, also participated.

Toyota’s new office in Argentina will coordinate the operation of 37 of the company’s independent distributors in 36 countries in the region.

Toyota has been operating in Latin America and the Caribbean for 66 years, with branches spanning across 39 countries; accounting for four vehicle production plants, two auto parts plants, and a training center in the region.

The decision to transfer some operations from Tokyo to the Zárate plant in the province of Buenos Aires will allow for the recruitment of more staff and encourage the development of Argentinian professionals.

Mr. Uchiyamada highlighted President Macri’s “strong leadership,“ referring to the steps the Argentine government is pursuing in favor of greater trade openness. He expressed gratitude for Argentina’s incentive policies implemented in the development of vehicles with new technologies (Rio Times).

The project seeks to pursue the brand’s growth and train Argentinian professionals to strengthen its entire operation.

As reported by the Association of Automobile Manufacturers(ADEFA),

“Dealer sales of automotive dealerships in Argentina rose 30.6% in June over the previous month, the first increase since March, driven by the government’s discount program to encourage the sector.”

Video: Brazil’s “Porto Digital” is 21st Century Latin America’s Technological Park

Porto Digital is one of the most innovative technological parks in Brazil, which brings together 300 companies and generates a total turnover of R$1.7 billion per year.

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