Brazil steps up in­vest­ments in tech start-ups

Finweek English Edition - - INSIDE - VINOD SREEHARSHA

For the last few years, Brazil­ian start-ups have be­gun to suc­cess­fully draw blue-chip Sil­i­con Val­ley ven­ture firms. But in the process, promis­ing tech­nol­ogy seg­ments have been ig­nored.

Although pri­vate firms are read­ily in­vest­ing in e-com­merce and other hot ar­eas, fields like nan­otech­nol­ogy, ro­bot­ics and in­for­ma­tion tech­nol­ogy – con­sid­ered crit­i­cal to trans­form­ing Brazil’s com­mod­ity-ex­port, con­sump­tion-de­pen­dent econ­omy – are fall­ing by the way­side.

Rather than leave in­no­va­tion fi­nanc­ing solely to pri­vate in­vest­ment firms, Brazil­ian of­fi­cials de­cided sev­eral years ago to step in and shep­herd nascent com­pa­nies. And in 2007, Brazil’s na­tional devel­op­ment bank, BNDES, started Cri­atec I, a 10-year ven­ture cap­i­tal fund of 100m Reais, or about R432m, aimed at start-ups. For­eign ven­ture cap­i­tal firms have been wel­come to make fol­low-on in­vest­ments. To date, not one has.

In­stead, Brazil has dou­bled down on its goal of pro­mot­ing tech­nol­ogy growth. Last week, the bank awarded a new fund of 186m Reais, or R801m, to Icone In­vest­ments. BNDES is pro­vid­ing most of the cap­i­tal, with con­tri­bu­tions from re­gional pub­lic banks. Though the government has been tak­ing the lead, it has not been for a lack of in­ter­est from pri­vate ven­ture cap­i­tal. Over the last two years, Red­point Ven­tures, Ac­cel Part­ners and Se­quoia have be­come ac­tive here, as have Peter Thiel, Dave

McClure and Euro­pean and Is­raeli in­vestors. But BNDES be­lieves a huge void re­mains in early-stage fi­nanc­ing.

“They are vo­ra­ciously in­vest­ing in all the paste-and-copy stuff, the copy­cats. They are not really into tech­nol­ogy in­no­va­tion,” said Robert Binder, whose pri­vate firm, An­tera Re­source Man­age­ment, co­man­ages the ini­tial Cri­atec fund with São Paulo-based Inseed In­vest­ments.

In­no­va­tion is an ur­gent mat­ter in Brazil. Ac­cord­ing to the Re­search In­sti­tute for In­dus­trial Devel­op­ment, this year through Septem­ber, the coun­try ran a $38.7bn (R348bn) trade deficit in tech­nol­ogy-in­ten­sive goods, an in­crease from last year. Brazil’s econ­omy is also vul­ner­a­ble to global eco­nomic un­cer­tainty.

A loom­ing de­mo­graphic shift is also a con­cern. In 2030, Brazil’s pop­u­la­tion is ex­pected to de­cline and get in­creas­ingly older, strain­ing government re­sources.

Ven­ture cap­i­tal firms in­vest­ing in Brazil’s start-up boom re­gard Cri­atec as well in­ten­tioned. Eric Acher, a found­ing part­ner at Monashees Cap­i­tal, called it a “great learn­ing ex­pe­ri­ence to fo­cus on in­no­va­tion”.

An­der­son Thees of Red­point e.Ven­tures also praised the fund: “It’s prob­a­bly tap­ping into very good op­por­tu­ni­ties early,” he said. Yet th­ese and other ven­ture funds have yet to team up with Cri­atec on in­vest­ments. For in­stance, Cri­atec looks for com­pa­nies de­vel­op­ing tech­nol­ogy and with clear in­tel­lec­tual prop­erty that can be li­censed or re­tained, ac­cord­ing to Thees. “Sil­i­con Val­ley is less in­ter­ested in this,” he said.

Acher agreed: “I don’t think at the moment Sil­i­con Val­ley is look­ing for tech­nol­ogy in­no­va­tion in Brazil,” adding that the re­turn did not yet jus­tify the level of risk in­volved.

BNDES ex­pected such risk aver­sion when it cre­ated Cri­atec. “Not even Brazil­ian funds were show­ing in­ter­est in earlystage com­pa­nies,” said Ed­uardo Rath Fingerl, a Cri­atec cre­ator. “We knew it would have to be en­tirely a BNDES ef­fort.”

BNDES, short for Banco Na­cional do De­sen­volvi­mento (the Na­tional Devel­op­ment Bank), has long played an im­por­tant role in Brazil’s rise. Formed in 1952, the devel­op­ment bank ini­tially fi­nanced ma­jor in­fra­struc­ture. Its scope and size grew con­sid­er­ably un­der former Pres­i­dent Luiz Iná­cio Lula da Silva, who thought Brazil needed brand-name multi­na­tion­als to gain re­spect overseas.

In 2003, the bank dis­bursed $11.7bn, but by 2010, that fig­ure had sky­rock­eted to $96.3bn. It has pro­vided sub­sidised loans to most large Brazil­ian com­pa­nies, in­clud­ing the oil gi­ant Petro­bras and the min­ing con­cern Vale. The bank has also sup­ported for­eign com­pa­nies, in­clud­ing $3bn to Amer­i­can Air­lines to buy planes from Em­braer, a Brazil­ian man­u­fac­turer.

Its dom­i­nance here has drawn crit­i­cism. Some con­tend the government bank has the wrong pri­or­i­ties, in­clud­ing fi­nanc­ing merg­ers and ac­qui­si­tions, which some con­tend should be left to the pri­vate sec­tor.

“Long-term credit is still a prob­lem in Brazil,” the Brazil­ian econ­o­mist Man­sueto Almeida said. How­ever, Brazil to­day is very dif­fer­ent from what it was 20 years ago. It has very ac­tive cap­i­tal mar­kets.”

Cri­atec, how­ever, is one of the bank’s small­est and least-con­tro­ver­sial pro­grammes. Almeida said that with this ini­tia­tive, “it is try­ing to do the right thing. That’s ex­actly what one ex­pects from a devel­op­ment bank.”

Cri­atec I has had a slow track record of success. Usix Tech­nolo­gies, an in­surance mar­ket ex­change-tech­nol­ogy firm that re­ceived back­ing from Cri­atec, was ac­quired by the pub­licly traded Ebix in 2010. It has also backed prom­s­ing com­pa­nies like Ama­zon Dreams, which devel­oped tech­niques to pro­duce açai and other berries with higher an­tiox­i­dant con­tent.

Some for­eign in­vestors are start­ing to look at the Cri­atec I port­fo­lio. In­tel Cap­i­tal, the ven­ture arm of the chip maker In­tel, is eval­u­at­ing the lo­ca­tion in­tel­li­gence soft­ware com­pany Ge­o­fu­sion, ac­cord­ing to a per­son briefed on the talks, who asked to be anony­mous be­cause the dis­cus­sions were on­go­ing.

Kleiner Perkins Cau­field & By­ers showed in­ter­est this year in the agropes­ti­cide com- pany Bug Agentes Bi­o­logi­cos but said the start-up first needed $10m in rev­enue. Now that com­pany is dis­cussing a strate­gic part­ner­ship with Is­rael’s Bio-Bee Bi­o­log­i­cal Sys­tems. But such po­ten­tial deals again in­di­cate that for­eign ven­ture cap­i­tal firms are still not court­ing the smaller start-ups.

“They all want to find th­ese com­pa­nies with $10m to $15m in rev­enue, but there just is not deal f low at that size,” said a per­son fa­mil­iar with Kleiner Perkins’s plans, who also asked to re­main anony­mous.

Based on 2012 es­ti­mates, only one Cri­atec I com­pany of the 33 in busi­ness will cross $10m in rev­enue.

Ama­zon Dreams’ rev­enue, for ex­am­ple, is still neg­li­gi­ble de­spite the health craze in the United States for açai berries.

BNDES also es­tab­lished the fund to help out aca­demics who have great ideas but don’t have the same success in ob­tain­ing the pri­vate sec­tor fi­nanc­ing that en­trepreneurs do.

“Brazil has a lot of in­tel­li­gence,” said Rath Fingerl, who re­tired from BNDES last year, but “the great dif­fi­culty is bridg­ing the di­vide be­tween the sci­en­tific and busi­ness com­mu­ni­ties”.

The fund also has lim­i­ta­tions. For ex­am­ple, the bank holds veto power on most com­pany de­ci­sions even though it is a mi­nor­ity share­holder. Yet, it ap­pears quite f lex­i­ble as it seeks co-in­vest­ments.

BNDES’s in­flu­ence in Cri­atec com­pa­nies “is to­tally ne­go­tiable”, said Marcio Spata, head of the Cri­atec fund at the devel­op­ment bank. “We are al­ways open to chang­ing our rights for ap­pro­pri­ate of­fers.”

Ed­uardo Klingelhoefer de Sa, head of the de­part­ment of funds at BNDES, said: “We would be very happy if pri­vate in­vestors come so that our stakes are re­duced.”

© 2012. Dis­trib­uted by Syn­di­cate.

Five years ago, Brazil’s na­tional devel­op­ment bank, BNDES, started Cri­atec I, a ven­ture cap­i­tal fund aimed at start- ups

Açai berries

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