High capital costs the new normal for entrepreneurs

Two experienced investors in Latin America, Mathias Schilling and Romero Rodrigues, took to the Venture Stage at the Web Summit Rio to pass on two basic messages to entrepreneurs: one, Brazil is the perfect place to start a global business; two, founders better get used to high capital costs because that is the new normal for venture capitalists and entrepreneurs.

Through their partnership with U.S.-based Redpoint Ventures in 2012, Messrs. Schilling and Rodrigues brought the first global fund to Brazil. They have invested in some of Latin America’s top tech companies since then, including Creditas, Gympass, Pismo, and Olist, to name but a few. 

Now, they are deploying from their third fund under a new brand, Headline Brazil, an early-stage firm with nearly BRL 1 billion (USD 199 million) in resources resulting from a partnership with San Francisco-based VC firm Headline, and XP Asset, the asset manager of Brazil’s largest independent brokerage.

“We believe that the best global companies could be created anywhere, as Silicon Valley today is much more an idea than a geographic center of innovation. In this sense, a business model that solves a pain point in Brazil and Latin America probably has everything it takes to succeed globally,” said Mr. Schilling.

“Brazil is a huge market on its own, with over 200 million people and a rising middle-class of young, tech-first consumers. At the same time, there are tons of problems to solve. For entrepreneurs, that is the perfect environment to create something amazing and expand globally,” Mr. Rodrigues added, emphasizing that startups in Brazil are no longer copycats of U.S.-based businesses, as was the case a few decades ago. 

“On top of that, Brazilian entrepreneurs know how to pivot faster and are keen on knowing their customers better than anyone. Over the last 25 years, I’ve noticed a mindset shift, with more entrepreneurs thinking globally, but this needs to happen more,” he said.

After praising the qualities of the local market, however, they said that Latin American entrepreneurs need to get used to working in a bear market.

“The [Covid] pandemic was an extreme period, with central banks pumping money, liquidity, into the markets, which always leads to speculation. Many markets have returned to normal, the old normal, and that’s what is happening in venture capital. We believe capital costs have grown by about ten times, and entrepreneurs should expect this new normal to go on for the next couple of years,” explained Mr. Schilling. 

In a subsequent panel, Laura Constantini, co-founder of Astella Investimentos (another Brazil-based early-stage VC firm), said she noticed valuations going down 30 to 40 percent in the last 18 months, while closing deals is taking much longer. 

“So, at this time, we advise founders when in talks with investors to show strong indications that they are truly able to raise money. In the past, founders would come to us knowing that it was not the right timing but that they were at a window of opportunity they couldn’t lose. It also might be a good moment to make partnerships and mergers,” Ms. Constantini said. 

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