Brazilian VC Launches Second LATAM Growth Fund

We cover burgeoning business activity in Brazil including the rapid expansion of venture capital investment (including a new growth fund) and a microeconomic revolution in the region.

Brazilian VC Base Partners Closes $135 Million For Second Latin America-Focused Growth Fund

São Paulo-headquartered venture capital firm Base Partners raised roughly $135.4 million for its second growth-stage venture capital fund.

The VC firm recently filed paperwork with the SEC, reporting that 43 limited partners have backed their latest fund. According to Crunchbase data and reports from August 2017, Base Growth Fund I closed at a comparatively small $75 million.

The firm’s website lists several notable portfolio companies; including U.S. payments giant Stripe, video-conferencing platform Zoom (which went public in April), and Chinese social media giant ByteDance.

Rapid Expansion of Brazilian VC Investment And Tech

Base Partners’ second fund arises amid a period of rapid expansion in Brazil’s tech and VC environment. According to LAVCA data, Brazilian companies raised $1.97 billion in VC 2018. Crunchbase data suggests that 2019 is on track to at least match VC dollar volume highs set by Brazilian startups.

To deploy its new fund in valuable deals, Base Partners will have to compete with the other key players seeking outsized returns in the region. As reported in last week’s newsletter, Kaszek Ventures closed $600 million across two new funds. Both firms will have to compete with SoftBank and its subsidiary investment arm, the Softbank Vision Fund. In March, the Japanese telecommunications giant announced it will  invest $5 billion in Latin American tech ventures through the SoftBank Innovation Fund.

Chile’s Central Bank Cuts Benchmark Rate to 9-Year Low as Economy Weakens

This Tuesday, Chile cut its benchmark interest rate to a nine-year low. The nation’s economy has recently struggled, finding itself caught between a global trade war and weakening domestic demand.

The central bank’s board, led by President Mario Marcel, cut the key rate by 50 basis points to 2%.

The central bank made a statement on its website, stating:

“The performance of the economy in the second quarter and its outlook point toward a longer-than-expected convergence of inflation to its target, which makes monetary stimulus more necessary. An expansion of said stimulus may be required and will be evaluated in the next meetings” (Bloomberg).

Chile’s economy has seen a decline in growth expectations amid a drop in business and consumer confidence, paired with a slump in the price of copper: the country’s main export product.

“After a surprise 50 basis point cut back in June, policy makers left the key rate unchanged in July as they gathered more information about the global economy and waited to see how other central banks would react to a slowdown” (Bloomberg).
Chile's economy: low growth expectations
Photo Courtesy of Bloomberg

Analysts now see it expanding 2.7% in 2019, less than the 3.4% forecast at the beginning of the year, according to data compiled by Bloomberg.

According to the latest central bank survey, bets on additional monetary easing are piling up. Traders are forecasting Chile’s key rate to fall to 1.75% by March.

According to Bloomberg’s Latin America economist, Felipe Hernandez,

“The post-meeting statement has a clear dovish bias that points to additional interest-rate cuts if economic growth and domestic demand remain weak. Policy makers are poised to maintain interest rates in the near term and wait for more information before making any additional changes, but lingering external headwinds and eroding household demand are likely to increase expectations for more rate cuts.”

Brazilian Business Gympass’ Global Success Story and Emphasis On Tech

In January, Cesar Carvalho moved to the United States to accelerate the expansion of his company, Gympass. This June, the company’s market value surpassed a $1B valuation, following a $300 million funding round led by Softbank.

The initial business model arose out of Carvalho’s practical needs during his time as a consultant at McKinsey. During this period, the comings and goings between clients across Brazil and the office made exercise nearly impossible.

“At one stage, I was paying memberships at three different gyms at the same time but I only rarely managed to use them. Then I thought of a monthly fee that would give me access to any gym, regardless of where I was - so that I could keep up a physical activity routine, even with all the changes at work. What we found out later was that companies would be willing to invest to [incentivize staff to exercise] by accessing flexibility at attractive prices, which makes employees who have never done physical activity start doing it,” he told Forbes.

According to Carvalho, 70% of Gympass users did not attend gyms before joining the service. The original business plan for Gympass, which today has over 2,000 corporate customers, was to sell access to gyms to end consumers with daily passes.

Brazilian Startup Expands To US Market

In 2017, the company entered the United States; where the market size and stage of development requires greater emphasis on talent and innovation. To address these demands, the company will have more than doubled its technology staff by the end of the calendar year; with 230 hires to enhance user engagement and retention.

“Investment in technology is important in order to keep the user base active, but is also key to the growth of the company’s network of more than 47,000 accredited gyms - in the United States alone, the company will be targeting 35,000 gyms, studios and fitness companies - as well as the portfolio of corporate clients” (Forbes).

The more gyms the startup enlists, the more attractive their proposal becomes to HR departments of potential customers. While the gym benefits from a greater influx of people, the end user receives additional options for gym locations.

“People always talk about the chicken-egg [dilemma], but in our case we have the egg, the chicken and the perch, because we’re a three-sided business that needs to focus on corporate HR departments, gyms and users. That requires a rather large investment,” Carvalho notes.

Within the next year, the company hopes to scale the resources from its recent mega-investor, Softbank.

“Having a fund like SoftBank by our side is a significant seal of approval, a confirmation that we are on the right track. Having a leader in global technology investment also works as a validation for people who might want to come to Gympass.”

The company’s international expansion currently has its sights set on the U.S. and Asia in the near future. According to Carvalho, Brazil is still one of the most relevant markets for the firm and is a country that will undoubtedly benefit from the global expansion. He said:

“We are at the beginning of a relevant technology development cycle not only in Brazil, but in Latin America. We see angel investors to more advanced stage funds all entering the market, exit deals and IPOs of companies providing good returns to their investors. There has never been such a good moment to invest in Brazil. All parts of the ecosystem are now there and the speed of growth will only increase from now on."

Brazil’s(Micro-) Economic Revolution

Despite the passage of  pension reform and impressive progress in the pro-business micro agenda, uncertainty surrounding Brazil’s growth outlook remains. Although such measures have rallied optimism about the longer-term, external uncertainties and the inability to revitalize activity through fiscal stimulus creates doubts for the near-term.

While the big macroeconomic fiscal reforms such as the social security and tax reforms tend are making headlines, consequential changes are happening somewhat under the radar. These measures taking place in Brazil right now are are part of a “longstanding productivity-enhancing agenda that has gained unparalleled momentum under the current administration.” Current efforts have been spearheaded by Economy Minister Paulo Guedes’s team, with the critical help from Central Bank governor Roberto Campos (ING).

Change Is Coming To Facilitate Conducting Business In Brazil

Given the size of the domestic market and how closed off it is to external competition, the majority of multinationals are present in Brazil. However, there is immense frustration among corporate executives about the excessive cost and uncertainty inherent to doing business in the country.

Such challenges are often a result of the encroachment of the state in business activities in Brazil. This economic “dead-weight”, as Economy Ministry officials commonly say, is illustrated by the poor ranking received by Brazil in the World Bank’s “Doing Business” project, which ranks Brazil (the 9th biggest economy in the world by GDP and 6th by population) at a low 109th place, out of 190 economies.

The chart below depicts Brazil’s ranking in each of the components of the overall “Ease of Doing Business” indicator.

Improvements To Conducting Business In Brazil

As depicted above, the biggest obstacles businesses face in Brazil involves the difficulties in paying taxes and obtaining necessary permits and licenses within the myriad of regulatory requirements needed to start and run a business in the country.

“To help address this issue, Congress is currently debating a tax reform, which is expected to be approved in the Lower House by year-end and in the Senate by next year. This is a high-stakes reform and its chief aim is to simplify and rationalise the tax code, merging several taxes into a single VAT tax.”

The number of regulatory changes being targeted (the so-called “regulatory norms” or “NRs”) is experiencing changes, notably thanks to the recently-approved Economic Freedom executive decree which focuses on simplifying the regulatory regime in place to open and run small businesses.

A drastically-reduced number of legal procedures are now required to open small businesses; allowing businesses to operate more freely, with a simpler, innovation-friendly regulatory regime.

Brazil’s financial system and upcoming “Credit Revolution”

Brazil received an exceptionally low score for its laws covering collateral and bankruptcy proceedings, which severely increases the risk of lending in Brazil; therefore explaining the notoriously high spreads prevailing in the local financial system.

A new law covering these issues has been under debate in Congress for a few years now. Government officials believe that the debate is now at its final stage, and the political momentum is favorable for eventual approval over the next year.

For central bank, however, legal insecurity is only part of the problem. Tackling other elements that contribute to the high spreads, such as competition and financial innovation, appears to be one of the most urgent items on the bank’s agenda.

“The much-anticipated “cadastro positivo” (“positive registry”), which paved the way for the arrival of US-style credit bureaus is another landmark piece of legislation that was just approved and is about to become reality. Up until now, only delinquency registries (or “bad credit” bureaus) were allowed in Brazil. The new regime should help reduce delinquency and the spread for good borrowers.”

Multinational Companies’ Gender Bias in Job Ads

In Mexico, some multinational companies have listed gender preference alongside qualifications like “education” and “experience”. Although discrimination on the basis of sex is illegal, it still remains a regular and open practice in Mexico.

Leveraging data captured by a Quaretaro, Mexico, firm, Bloomberg analyzed 10,334 job ads in Mexico City, the State of Mexico, Nuevo Leon, Jalisco and Guanajuato—the country’s main economic hubs—for about a week in August. The data revealed insights in some of the country’s biggest and fastest growing industries: logistics, sales, administration, engineering and manufacturing.

Of the 10,334 ads, more than 800 postings (roughly 7.7%) specified a gender preference, more often for men than for women.  According to this data, ads generally targeted men for more senior or managerial positions, while women were recruited for secretarial and customer service roles.

Administrative jobs - primarily for receptionists, secretaries and assistants - accounted for nearly 50% of all job postings seeking women. Sales jobs, including customer service representatives and cashiers, represented 38%.

In contrast, nearly one-third of job listings seeking men were for drivers, forklift operators, storekeepers or other logistics positions. The other 28% were for manufacturing jobs (including supervisors, technicians and inspectors). Although sales accounted for only 12% of the openings seeking men, they were more likely to be for management jobs and other more senior titles, unlike the sales positions seeking women.

employer gender bias Mexico

According to Alexandra Haas, President of Mexico’s National Council to Prevent Discrimination (Conapred),

“There’s growing awareness over these issues, but there’s still a lot of discrimination in the work culture in Mexico” (Bloomberg).

In places where discrimination is illegal across the board- as is the case in Mexico, the U.S. and elsewhere- it is still common, just more subtle, Haas said. Employers in Mexico can request a photo with a job application as an additional way to screen for gender, race or appearance.

The gender pay gap and discrimination in hiring have emerged as hot-button issues among the global economic elite in recent years. Bloomberg reports that the full economic enfranchisement of women is good for overall productivity. Closing the global gender pay gap would add $32 trillion to global GDP, according to the most recent estimate from the World Economic Forum.

While the multinational companies responded that the ads Bloomberg found are not consistent with their policies or practice, this data illustrates the legitimate challenge of connecting company rhetoric with on-the-ground operations worldwide.

Miami’s Rising Role as a Startup Tech Hub

A major question hanging over the business world right now is whether the cultural centers of American business are shifting. Miami has been pushing to establish itself as a global startup hub centered on Latin America.

According to the Economic Innovation Group, from 2010 to 2014, Miami was one of five metro areas (alongside New York, LA, Houston and Dallas) that accounted for 50% of all startups in the U.S.

The city has already established itself as a key Latin America financial hub. The Brickell financial center has the second largest concentration of international banks outside of New York, according to City Hub. In addition, Miami has a large “informal economy”, meaning that due to fraud and white-collar crime, it is difficult to tell how much economic activity is actually going on.

“Miami is fascinating because of its glitzy improbability… [The city] is somehow an emerging hub for Latin America without actually being in Latin America. From a capital of white collar crime in the 1980s, it wrested for itself an image as one of the world’s great, growing immigrant cities.”

Seven years ago, Cuban entrepreneur Manny Mendina (who sold his data center company Terremark, to Verizon for $1.4 billion),  decided that Miami needed an ecosystem builder. He created eMerge as a conference company with an affiliate philanthropic arm.

Felice Gorordo, CEO of eMerge Americas, told Forbes,

“Part of our secret sauce is that we’re a city built by immigrants. Miami is a very young city, But we have the grit and resiliency of those people. Miami is a startup in and of itself. If you’re willing to roll up your sleeves, you can make it here.”

Miami has the strength of an immigrant city on its side, with a rising, foreign-born population. “The thing with immigrant cities is that they keep their ties through diasporas to other parts of the world — and startup activity can flow along those links,” reports Forbes.

To try to capture this data, eMerge recently started a semi-annual report to highlight the connections between Miami and startups in Latin America. Gorordo noted that some American investors and researchers don’t even track Latin America.

“CBInsights — they think the only thing happening is in São Paulo. If you look at Pitchbook’s publications, Miami doesn’t get the attention it deserves.  Miami has benefitted from the booms and busts of Latin America and also the political turmoil,” he said.

Gorordo said that elements of Miami’s leadership are united around a common vision.

“More than venture-backed mega-funding and large scale exits, what makes a city like Miami a tech hub is if it has a thriving innovation and entrepreneurial ecosystem that draws on the support and collaboration of all the tentpoles: from government to higher-ed, startups to investors, corporate enterprises to media.”

Walmart Mexico Offers Same-day Delivery To Compete Against Amazon

This Monday, Walmart’s Mexico unit began offering three-hour delivery services for certain home and tech products ordered online.

In a statement, the company explained that the new service applies to roughly 12,000 products within certain dimensions delivered within Mexico; including laptops, cell phones, televisions and clothing irons.

This year, the retailer opened two distribution centers dedicated to e-commerce in Mexico - the company’s largest overseas market by store count - in a push to boost logistics and compete with Amazon. Amazon, which launched in Mexico in 2015, offers same-day delivery within Mexico City for certain items.

Andrew Ng’s AI Companies Expand to Colombia

Following his tenure as chief scientist at Baidu, Andrew Ng (Founder of the Google Brain project and former CEO of Coursera), has established a number of projects focused on making AI more approachable.

Various projects include the education startup, AI Fund startup studio for building AI companies and, which helps enterprises (especially manufacturing companies) use AI (Crunchbase).

Andrew Ng recently announced that he has opened a second office for these projects in Medellín, Colombia. Medellín, home to a number of universities, has evolved into a hub for the country’s startup scene thanks to incubators like Ruta N.

Ng told Crunchbase that that he chose Medellín after looking at a wide variety of cities across Europe, Asia and Latin America. He believes that the city offers a strong talent pool, as well as a solid educational system and business ecosystem. Another important factor is that the Colombian government has made technology a main focus in recent years.

“I see early signs of momentum for Colombia being a talent magnet both regionally and globally,” Ng said.

The company was able to hire team members from Poland, Bangladesh, Egypt and Chile for its offices in Medellín, which now employs roughly 50 people. Over the course of the next two years, Ng plans to expand the Medellin team to 150 - 200 employees.

Ng argues for the importance of setting up AI hubs outside of Silicon Valley and China, as they can provide a different perspective.

“We are able to share our AI ecosystem and Silicon Valley know-how with Medellín. We’re equally thrilled for our Silicon Valley team to be learning from the Medellín community. Local knowledge and innovation shared with a global community is what will catapult the technology forward,” he said in an announcement.

The Medellín team will work on all of Ng’s projects, including four unannounced “stealth portfolio companies” that are looking into using AI in sectors like healthcare, education and customer support.

📹 Video: Interview with Nicolas Szekasy, Co-Founder at Kaszek Ventures

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