August 20, 2013
Interviewed by: David Snow
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Tech Startups in Brazil: How PE Can Help

Patrick Arippol of DGF Investimentos describes the environment for tech startups in Brazil, why the country is a great place to seed innovations, and how PE and VC can help entrepreneurs manage its unique regulatory challenges.

Patrick Arippol of DGF Investimentos describes the environment for tech startups in Brazil, why the country is a great place to seed innovations, and how PE and VC can help entrepreneurs manage its unique regulatory challenges.

Tech Startups in Brazil: How PE Can Help
A Privcap Conversation with Patrick Arippol of DGF Investimentos

Privcap: You oversee the early stage practice for DGF, focused on technology. What’s unique about Brazil that might give those companies and advantage relative to Silicon Valley?
Patrick Arippol, DGF Investimentos: Absolutely, I think that”s a great question. There definitely are a lot of differences and if I were to focus on the advantages and speaking more from the leverage point of software and technology, which is really what we invest in, is I probably say three points, one would be creativity, the use of new technology, social networks, mobile phones, and the third would be a need that is different in developing markets versus developed markets. So just going a little bit deeper into those three. Creativity and software fundamental for innovative products and you have a lot of human capital here that is very skilled. I mean you have some of the best companies in antivirus, a lot of the professionals are out of Brazil, a lot of very compelling or very well-known professionals in Red Hat, Open Source also come from Brazil. So there are a lot of raw talent, but where they lack sometimes is more of the structure, more of the way in which they can build products with a larger group and so forth. So but the creativity from professionals from here and I work with companies with Israeli professionals, with Indian professionals, American professionals I think when you find the right professionals they”re very, I mean they”re very compelling and they do a great job. So that”s one point.
The second point is the usage of new devices, new technologies such as mobile phones, I mean I think it”s well known that a lot of innovative mobile phone technologies and mobile applications is taking place more in Africa and the Philippians and to some extent in Brazil, and if you look at Facebook users and so forth, per capita, I mean Brazil is a very, it”s above the curve in terms of how much people actually use those technologies. So I mean, especially of those two areas which are areas around our investment thesis, the usage and understanding of how these technologies can be leveraged towards a business that is starting around them, actually that”s another very important component, and I think another point in which Brazilian professionals can be or business can be differential is also that needs and developing markets and developed markets are very different. I mean for example, one of our investment thesis is Cloud software applications in the United States, one of the dynamics of the Cloud applications is that they have to be self-serviced, the professional has to be, or if you have a company that”s gonna use the Cloud application they have to understand how to use it by themselves. And in Brazil it”s not always that easy so you need A. to have a more simple application; B. to have channel partners that help to leverage your applications to the market so in essence for developing markets and we look at a lot of companies that start in Brazil but they can go to Mexico, to China, to India is essentially you can lever from them and understanding and being creative if you combine the three aspects that I mentioned, being creative, being resourceful in new technologies and putting a simpler way to develop or developing markets.
So you anticipate developing the capability in Brazil and then rolling it out to other emerging markets?
Arippol: Yes, that is one of our theses, it”s not the only one, I mean many times we find
investment thesis that well within Brazil, but often times we do find technology as well applied in Brazil at scale we could eventually take into other countries as well and I think that”s what a lot of adventure capital industry in Brazil strive for a lot of the investors are thinking and looking for those diamonds in the rough that could eventually become compelling technologies globally.
So what are some of the challenges in scaling those growing companies?
Arippol: Well I guess one point is that it”s you have to find companies that address a large enough market where you can get to that scale, so obviously these United States market where a lot of markets even though they are niches they can reach a significant scale, you have less niches like that in Brazil because it”s a rather smaller market. And so I think finding the market spaces in which you could become a dominant player or we could back a company to become a dominant player, in a market that is large enough, there”s less of those opportunities to scale. So it”s just a matter of choosing your fights if you will, or picking the winners for the right races I guess would be one way to put it. Another component is also management, even though my snapshot was from 2001 the bubble years in Brazil what”s entrepreneurs were like and today what they”re like and they”re light years ahead. I mean the really have evolved a lot during that time frame. Still, there”s a lot, long way to go I think especially in having more operational diligence being more focused on the metric, you see some entrepreneurs that are out of the scales in terms of how well they execute those dimensions. But often times too you need to help them get to that point as an investor and that is a trend, that is a need that”s being addressed to some point by the foreign nationals that are coming in here. So you have people from the United States, from Germany, from a lot of different countries that are coming here with that sort of diligence. And often times they are brought into companies and you mix, you know, the skills from the Brazilian entrepreneur that knows the local nuances with a lot of those metric focus and operational skills and so forth, so I think management is one of the big questions but the curve the country”s going through right now is phenomenal so hopefully if it continues we will be at spar, and I guess just another point would be the regulatory environment, especially when you”re in an early stage environment you have to think about bureaucracy and all the things that are harder for you to launch a company. I have the good fortune of launching a company here in the United States and it”s just, if you”re the CEO of a company, I guess one rough way to put it is here you have to spend maybe 30 – 40 percent of your mental bandwidth thinking about these issues of regulatory and faxes and things like that, whereas in the United States it”s simple. Simple and quick to launch a company, and maybe you spend 10 percent of your time on this issues. So it just allows you, it frees up more of your time and in Brazil and those things are changing too. So that”s another dimension in which startups could have an easier time to grow and not have to worry about these things, the regulatory aspects.
So then the experience VC and PE firms have with many businesses—and many regulatory issues—is a good selling point for working with private capital firms?
Arippol: Absolutely, the venture capital and private equity having seen a lot of companies go through a lot of issues, can help entrepreneurs really go through and handle these issues that are kind of some of the hurdles that you have in the regulatory environment. I mean there”s one saying which is, you know, to be an entrepreneur in Silicon Valley is tough, it”s tough, you have to align the stars for you to really make it big. To be successful in Brazil, it”s particularly tough, it”s very tough also because you have these regulatory dimensions. I mean even if you think back 2001 and 2002 I guess for you to be an entrepreneur you have to be a little bit crazy too because the odds were really not stacked in your favor, so you really had a lot of odds you had to go against. So yes, we as investors tend to help entrepreneurs to really navigate the environment, particularly if he”s a young professional, I mean one of our portfolio companies is Ingress, he”s a very an outstanding entrepreneur that came out of Stanford with a master”s degree, 23-years-old and we helped a lot, you know, what essentially he had to get around in terms of okay the regulatory aspects, the facts aspects, the getting your office established aspects. So we end up really getting involved with those aspects as well.


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