Archive for January, 2016

The StartUp Ecosystem in Brazil

Thursday, January 21st, 2016

by Juliana Saldanha, Marketing Director & Vinicius Roman, Project Director

@Techmall S.A.

Before we delve into our discussion in this post, it is important to understand what is an ecosystem. In biology, ecosystem is defined as a biological community of interacting organisms and their physical environment. In our case, we will discuss the Brazilian ecosystem of startups as a complex system, composed of a set of actors (entrepreneurs, startups, universities, government, incubators, accelerators, etc.) with specific roles and motivations, which interact to develop innovation and high value-added businesses. According to the survey “Fostering the Startup and Innovation Ecosystem“, successful ecosystems must have five main ingredients to leverage the success of startups: (i) talent, through the development of human capital to build and maintain a working force able to build businesses and innovate; (ii) density, since by increasing the density of thinkers and talented entrepreneurs, it is possible to dramatically increase the potential for successful ventures; (iii) culture, highlighting entrepreneurs as role models, accepting failure as part of the process of learning and teaching entrepreneurial skills; (iv) capital, both for beginners and for those who need to scale, noting the fact that intelligent capital really makes a difference to the business and (v) a stable regulatory environment, predictable and supporting both the entrepreneurs and investors. In line with this context, the Organization for Economic Cooperation and Development (OECD) defines six categories that influence the performance of entrepreneurial ecosystems. Analyzing these six categories in relation to the Brazilian ecosystem, Arruda et al. (2015) come to interesting conclusions. First, the regulatory framework should ease the bureaucratic barriers to the development of new business, especially when we talk about startups, since the dynamism to speed up this type of business and the processes that sustain its rapid growth are critical success factors. In Brazil, however, the laws are very outdated and the bureaucratic barriers are alarming. Thus, companies that break the traditional patterns providing products or services with innovative business models require many efforts to prosper. A recent case is of the startup Shippify  who received a Post Office statement to terminate their activities. In addition, the labor market is extremely protective and rarely flexible and entrepreneurs face many difficulties to open their businesses, and the shutdown process is very laborious. With regard to market conditions, despite the adverse moment that the country is right now, we can still have a relatively optimistic view regarding the possibility of attracting new business and technology. Companies that develop innovations abroad have great interest in Brazil because of a determining factor: the size of the country’s market. In addition, the number of startups has grown significantly  (18.5% in just six months), showing that this movement tends to go against the crisis. In the case of access to finance, in Brazil there has been a gap between the initial capital, funded mostly by the government, and venture capital funds, which operate with greater emphasis in the later stages of business development. Despite the supply of capital in Brazil, there is still uncertainty among investors to invest in fledgling businesses with high risk. Moreover, considering the current level and the country’s interest rate, conservative investments gain strength against investing in startups. In this context, Silvio Meira  highlights that Brazil has created a startup industry without creating a venture capital one, resulting in a chaotic environment (for more information read the article at the Brazilian Newspaper “Folha de Sao Paulo“). Considering the category creation and diffusion of knowledge there has been an intense generation of knowledge, but with a shy application on the market. The science in Brazil still depending largely on public money (more than 45%) and researchers are, mostly at universities. Regarding entrepreneurship, the OECD highlights two elements: (i) the presence of focused education for entrepreneurship and (ii) migration able to bring skilled foreign labor into the country, sharing ideas and entrepreneurial skills. Considering the first element, it appears that education focused on entrepreneurship is rare in Brazilian educational institutions, which have a greater focus on training employees and not employers. As for the second element, there is a lack of attractiveness to welcome foreigners and possibly retain them in the country, limiting the flow of knowledge according to UNESCO Institute for Statistics. Regarding the entrepreneurial culture, there is still a fail-resistance and, consequently, an aversion to risk, a fact that limits access to private funding for startups. To make matters worse, the short-term results by pressure can shift the focus of companies and inhibit business with high potential, but they need a longer time to perform (for example, in the healthcare field). Thus, the entrepreneur’s figure arises guided by the need, while it should be guided by opportunity. These reflections lead us to believe that it is possible to build a stronger entrepreneurial ecosystem in Brazil, but many changes are needed and there are several challenges ahead. We are fighting for this to happen and we know there is no victory without sweat. We are Brazilians and never give up!