As Brazilian Venture Capital Comes of Age, e.Bricks Bets on Local Enterprises

e.Bricks, a $100-million venture capital fund that targets start-ups specializing in e-commerce, information technology, and digital media, is rising up the ranks of Brazilian venture capital firms. Along with a $130-million joint venture between Redpoint Ventures and e.ventures, e.Bricks is among the largest bet in Brazil’s young venture capital scene.

Founded in 2012 by Grupo RBS, Brazil’s second-largest media company, e.Bricks is touted as “Brazilian DNA”. This stands to reason, since it is a Brazilian company with Brazilian management, which has given the company an advantage when it comes to negotiating in the gnarly environment that has long dogged business start-ups in the country. According to the World Bank, it takes almost 4 months to open a business in Brazil, compared to less than a month in India and about a week in the United States.

Also, the company’s early success has instilled a sense of confidence. Since October 2012, e.Bricks has invested in an average of one enterprise per month, a pace it will likely maintain through 2014.

E.Bricks eyes enterprises that generate over $1 million in annual revenue, involve a high degree of technology usage, and have a scalable business plan. Once identified, e.Bricks works alongside the company to increase revenue to a $50 million -mark. So far, eight enterprises have been funded in this manner, including Predicta, an online advertising and marketing company, Hi-Mídia, a search engine marketing and optimization firm, and Wine.com.br.

If these enterprises continue to prosper, it could inspire other entrants into the Brazilian VC market. “Demonstration of returns would drive more capital, both foreign and domestic, to enter the ecosystem,” notes a recent study on Brazil’s venture capital environment published by the MIT Global Entrepreneurship Lab.

Companies seeking financing squeezed between inflation and rising rates

Still, the venture is hitting the ground running just as Brazil’s economyic is slowing after years of rapid growth.

Market volatility, recently aggravated by protests, remains a major challenge. I spoke on the phone with e.Bricks Managing Director for Early-Stage Growth Companies Pedro Sirotsky Melzer four days after more than a million Brazilians thronged the country’s streets in opposition to graft and the government’s spending on the upcoming World Cup.

On the macroeconomic front, the country’s economic slowdown has yet to curb inflation, which has hovered above 6% so far this year. In response, the central bank has hiked benchmark lending rates twice this year, making Brazil the only OECD country to raise rates in 2013, and further rate increases may be next. Business operations in Brazil, especially for companies that can’t borrow from abroad, are being pinched between inflation and the rising cost of borrowing.

Then there are liquidity challenges, which make the start-up environment in Brazil distinct from many other countries. “The Brazilian market isn’t as liquid as that of the United States,” said Melzer. Raising capital remains difficult in Brazil, and even with a solid business plan and start-up capital, entrepreneurial firms are still several years away from executing a successful exit strategy. Foreign multinationals occasionally buy shining stars in Brazil, but IPOs remain rare.

Limited exits and kinks that go with scaling up operations mean that even the most promising Brazilian start-ups will likely need more access to capital. “Here there’s not so much a lack of capital for A-and-B rounds,” noted Melzer, referring to initial waves of money needed to get a business started, “it’s intermediate rounds that are the problem.” So, e.Bricks plans to use about half of its capital for ongoing investment as companies as they scale-up operations.

However, if there is an underlying assumption that gigs confidence about Brazil’s VC market, it is consumption. Brazil’s growing middle class is young, and, in the past decade, their appetite for all things digital has grown with every byte. “There are 1.3 mobile phones per person in Brazil,” said Melzer. One might add that there’s a compositional change toward 3-G telephony. Over the course of 2013 alone, smart phones are expected to go from 15 to 20% of the total stock of cell phones in use in Brazil, according to a recent article in the Financial Times.

But, beyond the shift from basic cell phones to smart phones, consumption and bandwidth may not rise in lock step. For one, the oft-cited 1.3 figure may signal market saturation, at least so long as Brazil’s economy continues to sputter along. And even if consumption offor tech wares were to continue its rise, Brazil’s patchy telecom network might prove a snag. Dropped calls are part of everyday life in Brazil, and this could hamper future growth across technology-dependent sectors.

Navigating these challenges will prove difficult, even without the threat of upheaval. Few private Brazilian firms have the resources to bet big, and outside multinationals looking to gain a toehold in Brazil may lack awareness of the particular challenges of business in Brazil.

The MIT report forecasts a VC environment of “fragile growth.” But despite challenging macroeconomic conditions, those firms such as e.Bricks, which combine local know-how with a promising track record, can lead Brazil’s start-up industry into take off. It is among these ashes that promising VC firms such as e.Bricks, which combine the local know-how with a healthy – though short – track record, will rise.

This is Sean Goforth’s first contribution to NSAM. Sean is the author of ‘Axis of Unity: Venezuela, Iran & the Threat to America’ (Potomac Books, 2012).