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Em Conversa Fintech Ecosystems South America

Em Conversa: Brazilian Venture Capital with Iporanga Ventures

Em Conversa looks to uncover the secrets in Latin America (LatAm) that have caused the fintech market to boom, from being worth less than $50million in 2016, to $2.1billion in 2022. 

This week, we speak to Leonardo Teixeira, managing partner at Iporanga Ventures, the Brazilian venture capital (VC) funds manager. Teixeria explains how the VC market has evolved in Brazil since the pandemic and how the economic climate in the region is impacting the development of VCs.

Can you tell me more about the company?

Iporanga is a Brazilian VC funds manager. We first invested in the technology market in 2011, then incorporated our first fund in 2014. Our second fund was launched in 2019 and finally, we structured our third SPV at the beginning of 2021.

We manage close to a hundred million dollars in tech assets, and we’ve always invested at the pre-seed and seed stages. Among the GPs and partners we share common financial industry backgrounds – some partners have worked in the past for international banks, such as Goldman Sachs, Morgan Stanley and Barclays.

We are located in São Paulo, and are well connected to the whole industry. More recently we’ve narrowed down our focus to the financial services space, with some good investments from our second fund in that space. Our third fund will be focused on financial services innovation in LatAm.

What are some venture capital trends we’re seeing in Brazil?

To give a little bit of context, we saw a massive acceleration during covid towards technology. As a result, we had a proliferation of new managers popping up every quarter because the trend was so strong.

However, we are now seeing many of these companies unable to raise further funds. Perhaps there will be some stabilisation for a dozen or so management firms as lots of these new funds target seed stage and series A stage.

What we saw was somehow a dry-up in growth stage money given all the losses experimented by those funds during last year. As a result, new deals activity has come off, and LP commitments have come off.

We also saw many many foreign funds coming to the region to invest, co-invest and participate in local rounds and if you look at the statistics, probably the region (Brazil and LatAm), they’ve created a number of unicorns after China and United States.

Although there has been this slowdown in activity, the region is still very prompted to invest. It is in dire need of developments, and innovations, so, in a longer term view we expect this money to come back and be invested in the creation of companies again.

What is Iporanga Ventures doing to improve the venture capital sector in Brazil and LatAm?

We are superconnected to the ecosystem. We try to be there to help those companies and entrepreneurs with relevant feedback. Over the year, we look at over 1500 companies, but we invest in less than one per cent of what we see. Our day-to-day is made of many many “no”s but we try to educate founders, as to the reasons why we are turning them down. We want to help them regardless of being investors or not because we strongly believe in the power of entrepreneurship and that we can change the region for the better.

How does the Brazilian venture capital sector compare to that of the rest of the world?

Compared to other ecosystems we’ve received far less money than other parts of the world. I attribute this to the fact that it’s a recent phenomenon in Brazil; the learning curve has gone up tremendously over the last seven to 10 years. So, as much as we stayed behind other regions in terms of capital inflows, the organisations have improved. The representation of Brazil by ABVCAP, which is the national venture capital association of Brazil, has improved dramatically.

As I touched earlier on the talent in the region – we have an abundance of talent. Take Nubank for instance as the example of a great company born and raised in Brazil. The company has had its IPO and proven that you can build great companies in the region.

We have a big consumer market – just Brazil is around 210 million people, but if you look at LatAm as a whole, the figure is even bigger. I think in the future, as the average level of entrepreneurs and investors keeps improving, and macro conditions settle, there’ll be a lot of money poured into the region.

Brazil is known for its influence in the agriculture and commodities space. A fourth of our GDP comes out of agricultural services and products and just financing needs of that sector in Brazil are around one trillion reais. VC money brings opportunities to explore in present and in the future in Brazil.

What are some unique challenges associated with the region/country in the venture capital space?

The VC finance chain in Brazil isn’t as large, profound and diverse as that of the US. In the US you will have a hundred venture funders for managers, whereas here that works well until the series A. Then for B and onwards it somehow reduces steeply, so companies have to operate in a different fashion. They may have to reconsider their models if they can’t find the funds.

In terms of the Brazilian market, specifically in terms of financial industries, for many years, we had (and still have) a very concentrated banking system. We have massive conglomerates such as Bradesco, Banco do Brasil, Caixa and Itaú. The Central Bank of Brazil has been working to promote competition, sponsoring innovation and now we have the open finance framework which is a success by all means. However, it is a very complex arrangement and requires a lot of effort initially. Therefore it takes time until it reaches the scale that everyone wants to see.

Final thoughts

VC managers across the globe have experienced a tough year in 2023. 2022 was a tough one, and this one has been a tough year so far too. It’s hard to guess when this will be over, it could be a matter of a year or two – in two years we could be doing a lot of business again (although I suspect it will actually be less than that).

But as for the region we can only expect inflows to grow. More companies will be created because it’s a fertile land for innovation and solutions. Entrepreneurs can tackle several societal problems and imbalances within the region.

We have close to 700 million people living in LatAm – it’s a large consumer market. In terms of user adoption of technology, folks over here are super keen to embrace new technologies. That won’t go away, that’s somehow our nature, a native characteristic of this population in this part of the world.

I think the message to whoever is seeing these thoughts is to try and meet a few VC managers over here, come down, see for yourself, and visit São Paulo other cities.

Over time you will build confidence to make investments, to be closer, to buy companies, and to participate in this ecosystem’s evolution. It has evolved a lot since 2010, but it has yet a long way to go in terms of growth. Not long ago any talk about VC investment was surrounded with suspicion and questioning. Family offices and local investors would be reluctant to make investments in that area.

Now it’s a common talk, everyone considers having an allocation to VC.

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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