Investors Go Nuts for Brazil

U.S. venture capitalists are spending a lot more time in Brazil, and it has nothing to do with the country’s famed supermodels.

The Latin American nation’s growing gross domestic product—projected to average 4.1% through 2040, in contrast to 2.5% for the United States—has transformed dozens of consumer Web and mobile startups into exceedingly hot properties that stateside VCs are aggressively (but quietly) trying to get behind.

Overall, more than $5 billion in private equity and venture capital was invested in Brazil-based companies in the first three quarters of 2010, more than double the $2.25 billion invested in 2009 and the largest amount in the past decade, according to the Emerging Markets Private Equity Association.

A recent Ernst & Young about Brazil states that of all the countries in BRIC, “Brazil in particular is poised for its moment in the sun. … With vast natural resources in a time of increasing global demand, a surging young population with an emerging middle class and maturing capital markets inspiring confidence in investors at home and abroad, the country is ready to transition to a more developed economy.”

Citing data from Preqin, the E&Y report notes that more than 15 private equity funds are currently seeking to raise a combined $4.9 billion to do deals in Brazil, ranging from buyouts to infrastructure deals.

At the same time, American venture firms are looking to back fast-growing Brazilian startups, particularly Internet companies. “We haven’t made an investment yet, but we’re looking at half a dozen companies down there and seeing a lot of other VCs,” says Alex Ferrara, a partner at Bessemer Venture Partners. “The size of the economy and the rate at which it’s growing is pretty hard to ignore.”

As a middle class emerges in Brazil—one with disposal income and an addiction to cell phones—dozens of businesses selling to middle class consumers are beginning to reach “tens of millions of dollars” in annual revenue, says Jon Sakoda, a partner with New Enterprise Associates (NEA).

We haven’t made an investment yet, but we’re looking at half a dozen companies down there and seeing a lot of other VCs. The size of the economy and the rate at which it’s growing is pretty hard to ignore.”

Alex Ferrara

Companies targeting Brazil that have recently raised financing include:

Locaweb, a São Paulo-based Web hosting company, which sold a minority stake to Silver Lake Partners in September for an undisclosed amount.

Mentez, a Miami-based social game maker for Brazilian Internet users, which raised an undisclosed amount of growth-stage financing from Insight Venture Partners in late August.

• And Vostu, another social game company serving Brazil, which closed on a round of up to $30 million round from Accel Partners and Tiger Global in late November. (Vostu is based in New York and has offices in São Paulo and Buenos Aires.)

Expect more deals to get done this year, say VCs focused on the region. It is “a land grab in some instances; it’s all about who can get the territory faster,” says Jeff Horing, a managing director for Insight Venture Partners who led the firm’s investment in Mentez and is wrapping up a second e-commerce deal outside São Paulo.

Horing adds: “I’m sure Groupon wants to be in Brazil, but there are four guys there already with local market knowledge and the same kind of first-mover advantage that launched Groupon in the U.S.”

Copycats aren’t a problem for investors. Because there’s so comparatively little infrastructure in Brazil, there are few incumbents most types of business, including the business of money. Consider that by most estimates, the venture industry in Brazil has less than $100 million under management.

I’m sure Groupon wants to be in Brazil, but there are four guys there already with local market knowledge and the same kind of first-mover advantage that launched Groupon in the U.S.”

Jeff Horing

Bargain shoppers know it, too. Horing estimates that VCs can currently pay anywhere from 25% to 50% less for a market leader in Brazil than for a Silicon Valley-based company with a similar growth trajectory. “Occasionally,” he adds, “you’ll see premier pricing.”

Because money is tight, there’s a lot less confusion over which horse to back. “In the U.S., you might have a dozen companies doing the same thing,” says Sakoda of NEA. “In Brazil, there’s typically one clear leader and one fast follower. Once a company is taking advantage of the growth of ecommerce or Internet or mobile usage in Brazil and that market begins to take off, their revenues start growing pretty substantially.”

Of course, as more investors catch on to such advantages, those advantages could disappear. That is why many VCs have been fairly tight-lipped about their interest in Brazil. “I’m starting to see a lot of Boston-based firms that are struggling showing up [in Brazil],” says one VC who asked not to be named.

Another U.S. VC who asked to remain anonymous declined to name other firms he was seeing in Brazil. “I don’t think my friends want to be outed,” owing to growing competition, he explained.

Given the possibilities, it’s no wonder they’re feeling proprietary.

Says NEA’s Sakoda: “We can’t forecast what we’ll do in 2011, but we have a number of reasons to be optimistic about Brazil.”

Lawrence Aragon contributed to this story