In recent years, venture capitalists have only dipped their toes in Brazil, where high taxes, government bureaucracy and an abundance of required vacation time make the country an expensive place for startups.
Now, two venture firms are diving in, deciding that the world’s sixth-largest economy is too important to ignore even with the risks.
Redpoint Ventures and e.ventures (formerly BV Capital) announced today that they’ve raise a $130 million fund to focus on early-stage Brazilian companies. The firms raised the capital primarily from existing limited partners and hired two full-time partners to manage the fund.
“There’s 200 million people, a very fast growing middle class, increasing disposable income, a dramatic rise in broadband penetration and Internet engagement is really high,” said Jeff Brody, who co-founded Menlo Park, California-based Redpoint in 1999. “That makes it worthwhile to bear the burden of the additional overhead.”
Among the biggest and fastest growing emerging markets, Brazil’s startup investing has lagged behind China and India, which are home to numerous dedicated venture funds started by U.S. firms. Investments in Brazil have mainly focused on companies that mimic successful U.S. e-commerce and social-networking startups.
Redpoint started looking at deals three or four years ago, said Brody, and made its first bet in 2010, when it invested in Grupo Xango, a Web security and backup services provider that BV later backed. Redpoint has since invested in online travel agency ViajaNet and web fashion company Shoes4you.
Redpoint and e.ventures announced their plans to raise a fund in March. While the fund is the first of its kind for U.S. firms, others have been making investments in the past two years. Accel Partners backed Shoes4you, handicraft marketplace Elo7, review site Kekanto and gaming site Vostu. Benchmark Capital and General Atlantic funded daily-deal provider Peixe Urbano.
Sequoia Capital has a full-time partner aiming to do deals in Brazil though it hasn’t raised a fund there. In 2007, Draper Fisher Jurvetson stepped into the country by partnering with FIR Capital Partners, and raising a $40 million fund.
“It takes a while for ecosystems to develop,” said Elizabeth Clarkson, who recently joined SAP AG’s venture arm after five years as director of Draper Fisher’s global network. “You not only need the local investors to get some momentum but you need entrepreneurs to develop their ecosystem, who they work with and who their mentors are.”
Clarkson said the government bureaucracy and economic system are also challenging. According to the World Bank, it takes 119 days to register a company in Brazil, compared with six in the U.S., 29 in India and 38 in China. Companies pay 67 percent of their profit in taxes, versus 47 percent in the U.S., 62 percent in India and 64 percent in China. Employees with one year at a company are entitled to 26 days of vacation in Brazil, while employees in China get five, those in India get 15, and in the U.S. there’s no minimum.
Mathias Schilling, managing partner of e.ventures in San Francisco, has traveled to Brazil 14 times since 2009, when he first started looking at investment opportunities. He said that understanding the tax issues and government policies is essential to investing there, as is having people on the ground.
Redpoint and e.ventures hired Yann de Vries, a former Cisco Systems Inc. executive and Anderson Thees, who previously spent about a decade at Brazilian startups and financial firms, to run the fund.
“We see people flying down, but there’s a big difference when you really start a fund, make that commitment and hire a local team,” said Schilling. “We’re really seeing that it’s at an inflection point. With the first successes and more and more interest going into startups, we see it changing.”