CONNECTING GLOBAL INVESTORS TO BRAZIL'S THRIVING ECOSYSTEM

Welcome everyone to the Nearshore Cafe podcast, where we talk about the stories and people doing business in Latin America. I'm Brian Samson, your host. And if you're interested in the investing landscape and ecosystem in Latin America and in particular Brazil, this is gonna be a special podcast for you. We have Mitsuru Nakayama and he is an expert in this space. Before we jump right into it, this podcast is sponsored by Plug Technologies, plugg.tech. Plug is a great way to connect all the amazing talent from Latin America to growing US companies. Let's get right into it. Welcome to the show, Mitsuru.

Thank you very much for having me here. My pleasure to be here.

Amazing. Well, let's just start. Let me ask kind of a general overview. As you've been an investor in Latin America for a little while, what does it look like today? Do you feel optimistic or pessimistic? Right now?

Well, very optimistic actually, because, well, of course, like the same as the US market, venture capital market got like some like adjustment like after 2022 and 2023. So we are kind of like in a slow mode in these years. However, I think that as we had like a big wave in 2020 and 2021, The wave made a lot of experienced entrepreneurs and made several unicorns, meaning like a lot of like people working in growing startups in Latin America. I think it's more than like 50 companies became like unicorns at that time. So that kind of like gives us like a very much better opportunity of the potential like excellent expert startups and entrepreneurs in the regions. So we feel that when we started investing in Latin America in 2014, and as we are looking at like these entrepreneurs today, and after 10 years, I feel the quality of the like, or excellence of the business plan and analytical perspective of the problem solutions became much better than that of 10 years ago.

I'd like to talk a little more about Brazil as a standalone country when it comes to the VC tech ecosystem. How is it maybe the same? How might it be different from some of the other powerhouse countries like Mexico, Argentina, Colombia? I would love to hear more.

Well, I think first of all, we kind of divide Latin America in two different regions. One is Brazil, which speaks Portuguese, and the other is like Spanish-speaking Latin countries. Characteristics of Brazil is like the population, more than like 200 million people, and also the country itself is very strong in terms of like a lot of like natural resources and all stuff like that. So the economy is much stronger than other countries. And that's why it's kind of like an independent ecosystem, I'd say. And also thinking like a venture capital industry, the local government helped a lot to invest on startups. So it means you need to establish a fund in Brazil and invest on like a Brazilian startup. That was the beginning of the ecosystem. So it means Brazil has like a longer history of like ecosystem. And also the volume of the investment on startups has been like much larger than other countries in Latin America. And also people in Latin America say Brazil kind of like rapidly adapt new technology or like a new business model. One good example could be rideshare. When rideshare like Uber and at the time there were like a Cabify and local 99 Taxi started operating in Brazil, Brazilian government started creating regulation for the rideshare, not like adapting or modifying the taxis regulation, which is totally different from the movement that we see in Japan, for example. Japanese government would like to put these new businesses into some traditional business framework. In terms of regulation especially, that can be kind of like, well, prevent opportunity to take advantage of having like a very high— let me look for this again. That kind of like movement by government can prevent from local people take advantage of new technology or new business models. And the similar things are happening in, for example, like a drone in agricultural areas. Brazilian government like relaxed the regulation of the payload of the drone, especially in agricultural land. There is almost like no people living there. So in many countries, if the drones become like more than 25 kilograms, then the regulation got to be a little bit more strict and it's kind of tough to really like operate the drone in these areas. So in A few years back, well, people were like operating drone within this like a weight limit. However, a few years ago, Brazilian government opened up the weight limit only in agricultural land without any limit. So you can have like a large drone, like, uh, which can be replaceable to the, for example, helicopters or sometimes planes. That reduces a lot of carbon emissions because you don't need to fly with a plane. And also, as drones can fly very precisely to spray in a specific location, for example, that reduces use of chemical materials by 80%, for example. And this kind of movement is continuing, for example, in stablecoins. Brazilian government kind of decided how to make interbanking transaction using stablecoin, how to report officially to make it like an official transaction. But before that, it was considered kind of like a gray zone. People were thinking it's going to be okay. However, there might be a risk. And as government decides how to do it, even though it's kind of like complicated, that people kind of safely operate and innovate the business within the legal framework. And other countries probably are seeing like the tendency will be there. So many other Latin American countries are looking at Brazilian government regulation policy as if it's going to come to their own countries.

Yeah, interesting, interesting. And when you talked about volume of investment, I wanted to peel the onion a little bit in terms of, you know, how investors there are maybe thinking about check sizes, size of rounds, and then how that might even be allocated. You know, for example, you know, we've spoken to entrepreneurs in like Lima, Peru, and they need significantly less money than a US startup. And they're also able to pay much better than domestic companies so they can attract talent much easier and love to see how that plays out in Brazil.

Yeah, well, that's a very good question. We see like interesting, like a different dynamics among countries. So I guess what determines like a valuation, ticket size and everything based on the kind of like a history or like accumulated experience as an ecosystem. So for instance, I guess like if there's like two companies, same revenue size, like approximately the same growth rate and everything. I think a valuation in Brazil can be a little bit lower than other countries in Latin America. The reason is, as Brazil experienced a lot of like exit, mainly by M&A, some more like IPO, people understand how much they can gain at the end of the journey of a startup. So as VC, we like calculate in an inverted way. So as you need to have like several rounds, each round should have like a double or like a triple evaluation. And then at this stage, the valuation should be like X dollars. But in other countries in Latin America, I see like there are not so many like exit cases. So people don't have numbers. So that's why kind of like any startup can be unicorn is the kind of expectation by investors, especially in the initial phase. So people see like, okay, $1 million, $3 million, $5 million valuation can be similar because it's going to be like $1 million at the end of the day. And another different characteristic can be type of investors. In these 10 years, Brazil kind of created experienced investors, both microfunds and individual investors, like angel investors we call it. However, in other countries in Latin America, well, Mexico has a little bit better than others, but in these countries, people like experiencing the first cycle of the investment in stocks. So, uh, there is a very big lack of the experience of how much will be at the end of the, uh, the day. So, uh, people are a little bit like optimistic in these countries which doesn't have like actual numbers. And so that's kind of like a struggle that we may face because we know how it's going to be Brazil, a little bit like Brazil because of the market size, but people are like more optimistic in Spanish-speaking countries. So that's why kind of we are trying to like share our experience as much as possible, launching our venture financing online courses in Spanish, for example, to try to like establish kind of like a market, market standard in a way. But comparing with the US startups, for sure valuation is much lower. And so ticket size can be much smaller. So for example, we are in the pre-seed round. Valuation of the startup can be like $1 to $4 million. Our ticket size could be $100 to $200K. And startup has, let's say the recent investment we made, the startup had $35,000 revenue per month. Profitable growing 10% per month, but still like a $4-5 million valuation. I guess it might be much lower than US or like even like Japanese market.

Are there particular regions that you see are taking off more than others, say Florianópolis or São Paulo, Rio, you know, where, where, where is the hottest space right now?

Well, it's a little interesting in Brazil. There's not so much like a concentration. For example, São Paulo is the kind of the biggest city in terms of like commercial, uh, and also like population and everything. However, as Brazil is too big to concentrate everyone in one city, each state has like a good like educational system and good universities, and people tend to like stay in, um, like our local regions. So if we look at our portfolio, for example, I would say like 40-50% are in São Paulo but the rest is kind of like scattered in several cities. So we don't see much of the like a geography, but I think an interesting area in Latin America in general is fintech area. And because of that, but as Brazil experienced like one cycle of the what kind of like a business model works and doesn't work. So we see several sub-areas. Where there might be more potential than others. And well, as I kind of commented about the stablecoin transaction, how to adapt new technology to a real social implementation happens rapidly in Latin America. So we are looking at this area as well. And we are kind of feeling the SaaS business model kind of started getting the traction in Latin America. I guess, well, so as you may see, this kind of happens like a few, I would say like years after what happens in other countries. So as we, I know much about like a Japanese startup ecosystem and of course like in general we follow US startup ecosystem. So that can be a very good reference point and the benchmark for us to decide like where to like look more and how to make a decision.

Interesting. As you talked about maybe some of the apps that might be more successful, and I'd love to hear just more about how consumers might think about that. For example, you know, in China, it's often like the focus on super apps that, you know, do many, many things. In the US for a long time, it's, you know, pick like a very singular focus, do that excellent. How might Brazil think about that?

Brazil is pretty much similar to the US market in that sense. So one kind of like particular example is like Uber. Uber is dominant in Brazil for rideshare, and Uber launched Uber Eats for delivery for the food services and also grocery. But Uber Eats just stopped operating in Brazil a few years ago because there is another local app like iFood and Rappi are very strong in the region. So, and also I know, well, Asian countries also have a lot of like a super app. However, I don't know why, but super app doesn't happen so much in Latin America.

Yeah, yeah, I've seen that. I've seen that too. And also, as we're thinking about Asia, you know, I think about San Francisco as a very, very mature market for startups. And the way that I might measure it is 3 things, you know. Do you have capital? Do you have talent? And then do you have mentors, right? Like people that recycle their knowledge, recycle their their capital and so forth. They have exits, they stay there, they reinvest, right? So I look at a country like Singapore that almost tries to like buy their way into it. You know, they don't quite have the talent or the mentorship, but they have the capital. You know, let's, let's, let's try to accelerate our, where we are. Where is Brazil? Like, is there, has there been enough cycles where like the mentorship and exits have flown through?

Well, I think it's still like evolving. So I wouldn't say like it's very much established yet. So I'd say like, let's say 10 years ago when I kind of started investing in Brazil, there are not so much like so many entrepreneurs We see, I'd say, like, uh, oh, like a higher education, like a better background in general, because Brazil, there's like a almost like a 10% interest rate per year. So once you have like a 1 million, you get like 100K without doing anything. And, uh, uh, it's very like a diversified country. So if you're in like a top tier in terms like education and the financial status, it's kind of much easier to stay in a kind of big company. So being like a public, uh, employees to kind of maintain the status and they pay well. So, uh, at that time there was only one exceptional startup made a very big exit. However, in general, let's say you can sell the company at $10 million. And at that time you kind of dilute that 50%. You have 3 founders, you get $1.9, $1.7 million in 10 years. But if you work at the company, you get $200,000 and you keep like accumulating the interest by 10%. So there was not so big financial incentive at the time. However, in 2018, 3 Brazilian startups made an IPO in the US and then the value was a few billion dollars. That kind of like totally changed like a mindset of being an entrepreneur of a startup or like a tech area in Brazil. So before that, I think it was very tough to find experienced mentors in Brazil and that they were scarce of money because when we started in 2014, $400 million was the whole amount of the investment down to the startups in Brazil. But eventually in 2000, that like a kind of trigger of 2018 and the top was 2021, I say $10 billion went to Brazilian startups. So big difference in only 7 years. And as I said, like, well, there are a lot of unicorns and many people can start making exit. Some entrepreneurs became investors, launched some VC funds. So VC funds, and we see a lot of like successful entrepreneurs working in VC funds. So these people naturally kind of share their experience. So that flourishes Brazilian ecosystem. However, I guess it's so much limited ecosystem with a very limited number of people are here. So I guess we see a lot of like opportunity in the future as well. But comparing with other countries in Latin America, I guess we have much better like experienced mentors in Brazil. And also the capital as well at the same time. So that's kind of like how we call it like ecosystem, right? So ecosystem started like rolling in Brazil, but still some other countries are in the beginning of the development of the ecosystem. So that we see like a very big time difference between Brazil and other countries in Latin America.

I'd love to hear more about your firm. Tell us about, are there any sectors that you're particularly focused on right now and check sizes? And, you know, if there are entrepreneurs that are interested in speaking with you, you know, what should they know?

Okay. Yeah. Well, we, BVenture Capital, we started in 2014 in Brazil. So first fund only invested in Brazilian startups. So we made 12 investments in Brazil. And the second fund we started in the beginning of 2021. And from fund 2, we expanded to other Latin American countries as well. Well, as the world in general became like online basis. So having some Spanish speakers in the team, we can cover like almost all Latin American countries is the idea. In reality, it's not that much like online base. We still need face-to-face communication and stuff. So from then we have teams in Colombia, Peru, and Brazil. And my colleague or co-GP is in Peru as well. He's a Peruvian. And then from the second fund, we invested in 25 startups. So in total, we have 37 investments in Latin American startups. And now we started our third fund. We made the first investment in a Brazilian startup from our third fund. So our third fund focuses more on fintech and SaaS. And well, I think we're going to invest 50% to Brazil and the rest can be divided by other Spanish-speaking Latin countries. And our check size is $100K as an initial investment, but we do a follow-on and we'd like to enter in the first round. I mean, after family and friends run with some revenue, even though small, it's fine. But it doesn't have to be like a profitable for sure. However, we want to invest on a startup. It's just like a get out of the kind of prototype mode. It can be okay with the MVP, but still you need to have some paying customers for us to invest.

Excellent. Excellent. And then just aside from business, what's life like as an expat in Brazil? And then maybe you can also comment on, there are a lot of Japanese living in Brazil too.

Yeah. Well, it's a very, I mean, for me it's very good part of the life in Brazil because I think the recent statistics shows more than 1.4% of the Brazilian population is Japanese descendants. So, and especially concentrated much in São Paulo. So if you like walk around the city, you see a lot of like original faces. So it's kind of like, well, makes me comfortable because I don't like kind of stand out in the middle of like anyone. And I would say like Brazil has a lot of like different cultural backgrounds. If you don't speak any, like, anything, you can be Brazilian. I mean, from the, like, a physical appearance, you cannot tell who is Brazilian, who is not Brazilian, literally. So, uh, that's— and also people are very open to, uh, uh, foreigners as well. So I remember when I started working at the band company in São Paulo, I didn't speak any Portuguese, so I needed to use like a translator, like a Google translator for example, and I need to repeat questions and people kind of like patiently listen to me, my very poor Portuguese. So that is totally different from like a cultural acceptance in Japan, for example. If I don't speak like a full important Japanese in like a Japanese brand company's office, maybe I can work in like very 100% English project with say like English speaking clients. However, I cannot be working like a Japanese project, right? So, uh, the acceptance to, uh, foreigners is very warm and very comfortable. And also, like, food is amazing. I mean, not only in Brazil, but many countries in Latin America, they have a lot of, like, uh, good food and high-quality ingredients as well. Uh, Peru is also quite famous for, like, gastronomy, but also other countries also so including a lot of things. And I can easily find like Japanese food in Brazil. So that's a very good part of my life. So I think in general, I don't feel like I'm an expat. I kind of immigrated as a first generation. My wife is Brazilian as well. I met her after I kind of moved to Brazil. So, and also kind of interesting, probably I'm the only one Japanese in my firm. So, and it was called like a Brazilian, Brazil venture capital, but now we kind of like became like a B venture capital. So no one knows from where we are from. So it's very interesting, like a mixture of the culture and people.

Amazing. Amazing. Are there any particular restaurants you'd like to mention on the show if anyone is traveling there that your recommendation?

Oh, I think there are a lot of good, we call it churrascaria, the churrasco, like Brazilian barbecue style restaurant. Like, as you can see, probably the US, fogo de chão. Fogo de chão. I don't know how to pronounce in English. And also we have a lot of, like, my friend is reminding a very good French bistro called Le Jazz. In São Paulo, they offer some very good type of French bistro dishes. And we have a lot of like vegetarian restaurants as well. So I mean, it's kind of hard to like pick one, but however, one thing, one dish I'd like to recommend to everyone is called a moqueca. It's kind of like a seafood stew with a kind of with a coconut milk, a lot of like fresh fish or sometimes seafood like shrimps and stuff. So, and also caipirinha, which is a kind of local cocktail made by cachaça. Cachaça is like a rum made of sugarcane that is also delicious, mixed in with local delicious foods as well. So I mean, there are a lot of things you should try. So you should come here not for a week but for a month or something, but still you are not tired like trying a lot of like delicious food here.

Amazing. Fantastic. Well, Mitsuru, this was such a pleasure having you on the show. Really appreciate your time. Learned a lot about the Brazilian ecosystem. You're listening to the Nearshore Cafe podcast. Brian Samson, your host, and this is sponsored by Plug Technologies, plugg.tech. Great way to connect talent from all over Latin America, including Brazil, with US companies. Thanks everyone for listening.

We'll see you next time.