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Innovation in the industry, CVCs' advancement, AI, and regulation: A summary of the Brazilian Venture Capital Forum Added in 6/13/2023
During the opening, Piero Minardi, President of ABVCAP, emphasized that venture capital is an investment type that has come to stay in Brazil, generating jobs and taxes, and helping the country to develop. According to him, legal certainty is essential to ensure the continuity of investments.

"We have an important foundation that has affected the entry of resources into the market, which is the legal uncertainty for foreign capital in Brazil and also for local investors. This impact is not insignificant, as 60% of the capital is foreign. Domestic capital also suffers, such as pension funds, from these regulatory problems," commented Minardi.

Anderson Thees, Vice President of ABVCAP, believes that the impact of venture capital on the economy is more visible due to the strong growth of the industry in the past five years. "We need to catch our breath, ensure that we will come out on the other side, without minimizing the crisis due to liquidity issues. The moment is to organize ourselves and work. It is a long-term asset class," he says.

During the forum, Inaiá Selistre, Senior Analyst at TTR, also presented data from the latest report on the Venture Capital and Corporate Venture Capital industry, released by ABVCAP in April this year.

Why invest in Brazil?

According to Mário Mesquita, Chief Economist at Itaú Unibanco, the good macroeconomic news of the year was the end of the cycle of rising interest rates. The next development, according to him, is the beginning of a decrease in August or September, earlier than the bank's and the market's prediction that the Selic rate would only start to fall at the end of the year.

"If macroeconomics is well managed, it fades into the background. Brazil is a large market, very open to innovation, quickly adopting emerging technologies. It is a country with institutional difficulties but with checks and balances," said Mesquita in a session moderated by Bloomberg Línea reporter Isabela Fleischmann.

Fernando Arakaki, Executive Director of Siguler Guff, shares a similar view, believing that Brazil benefits from the current scenario, which includes geopolitical conflicts in other regions, economic contraction in China, and specific challenges in India that hinder long-term investments. "If we compare relatively, we believe that Brazil is well positioned," emphasized Arakaki.

Lessons from VC Reset

Venture capital is patient capital, and now is a good time to invest. This assessment was made by Lívia Faria, Investment Fund Manager at BNDES, in the third session of the forum moderated by Eduardo Zilberbeg, partner at BZCP. According to her, the bank plans to invest up to R$ 1.5 billion in six funds this year. "We believe the timing is good, prices are favorable. Our portfolio is quite profitable, and we have had very good divestments," she commented.

Sullyen Almeida, Principal at Monashees, agrees that it is a good time to invest but alerts that caution is necessary despite the more favorable cycle. Michael Nicklas, partner at Valor Capital, highlights the evolution of the ecosystem, which has been observed in recent years.

According to Frederico Greve, Managing Partner at DGF Investimentos, this evolution helps project the Brazilian ecosystem into other markets. "Ten years ago, you couldn't get through the door of Silicon Valley, be received by an investor there, and that doesn't exist today. Now, with a good business and a few connections, you have access to investors from all over the world. This has enormous value for Brazilian entrepreneurs," Greve emphasized.

CVCs: When do financial returns come?

The number of Brazilian companies investing in Corporate Venture Capital (CVC) is growing. In 2022, 13 publicly traded companies started CVC projects. In just the first quarter of this year, R$ 180 million was invested in innovative companies. In 2022, the amount was R$ 5.43 billion. This advancement was the theme of the fourth session of the Brazilian Venture Capital Forum, moderated by João Busin, partner at TozziniFreire Advogados.

Gabriela Toribio, Managing Partner at Wayra Brasil/Vivo Ventures, argued that there should be more education about the role and activities of CVCs. According to her, patience is necessary as corporates typically have a three-year timeline. Pedro Meduna, co-founder of L4 Venture Builder, shares the same view. "If you want to create a large fund and have immediate returns, there is a good chance you won't succeed," Meduna commented.

The panelists also discussed strategic and financial returns. According to them, it is not enough to expect CVC investments to translate into profits alone. "Of course, we focus on returns, and we have been able to multiply capital between 10 and 30 times. But one of our main focuses is sustainability," said Emilio Escartin, CIO of Guil Mobility Ventures, a CVC focused on mobility solutions.

Meduna believes there is no universal rule that applies to all cases regarding financial returns. "It's one of those philosophical discussions about what your corporation is, what your main needs are, where you see the most value, and the answer may vary depending on the corporation you ask," he commented.

Gabriela agreed. At Vivo Ventures, according to her, it is necessary to seek ways to add value to the innovative companies in which they invest. "We look at the financial return, we don't want to lose money, but we also look at how to add value to the corporations."

According to Escartin, who invests globally in mobility solutions, one possibility is to help businesses create sustainable jobs, especially considering the rapid transformation of society. "In the mobility industry, things are changing rapidly. In the near future, 15 or 20 years from now, cars will be shared with other people, they will be electric and autonomous," he said.

Challenges of innovating in fundraising amid resource scarcity

The latest ABVCAP report on the venture capital industry, produced in partnership with TTR Data, showed a 42% retraction in fund investments in the first quarter of this year. The reduction in liquidity challenges funds to innovate in fundraising. This was the theme of the fifth session of the Brazilian Venture Capital Forum, moderated by William Nakasone, partner at Abe Advogados.

According to Renato Ramalho, CEO of KPTL, sectoral, technological, and management specialization can contribute to attracting new LPs (limited partners). "The sectors in which Brazil can have a leading role, availability of human capital, technological knowledge, IoT, agriculture, climate. These areas in which we have a differential, when we go abroad, we can differentiate ourselves," commented Ramalho. According to him, not all products and sectors can generate multiplied capital.

Laura Constantini, partner at Astella Invest, pointed out that the scenario is challenging, especially in terms of fundraising. However, she believes that there are still significant opportunities since valuations have adjusted. Her analysis was based on the LP's perspective towards the manager, and in her opinion, two key points determine the investor's decision: seeing the portfolio's performance in terms of additional rounds of funding and considering how the partnership was built and how long the founders and the team have been together.

"In the end, it's a marriage of at least ten years, and many things happen. When talking to the team, it's important to understand if the information is conveyed in the same way, how the processes work, and how the management company actually operates. It's the basics," said Laura.

Diversity among LPs is another important aspect, according to Renato Abissamra, partner at Spectra Investments. He believes that funds also need to engage with investors continuously, regardless of the liquidity situation. "Having a diverse base protects funds during downturns," he commented.

Along the same lines, the panelists emphasized the importance of persistence in the face of rejections. "Persistence is necessary. Corporates and family offices have money," defended Thomas Bittar, co-founder of Indicator.

According to Bittar, this strategy aligns with the persistence required when approaching LPs. "We have a deep tech fund focused on IoT, connectivity, and AI, and we're hearing a lot of interest from potential LPs who keep saying no but will eventually say yes," he concluded.

Allocation of resources in VC by international LPs

The attractiveness of the Latin American market for venture capital investors was the theme of the sixth panel of the conference. The discussion was moderated by Anderson Thees, Venture Capitalist at Itaú Unibanco, co-founder and Partner-Director at Redpoint eventures, and vice president of ABVCAP.

The International Finance Corporation (IFC), the World Bank's investment arm focused on the private sector in developing countries, is still exploring the region's potential. Carlos Renato Moreno de Almeida, Senior Investment Officer at the institution, explained that IFC's investment decisions are less influenced by the economic activity cycle and more by asset evaluation. "In our conversations with funds and companies, and looking at recent investment rounds, we see that in many cases, there has not yet been a correction in prices; we have not seen the full correction. We invest with our own balance sheet, so we don't depend on fundraising. When we see good companies and good opportunities, we are ready to invest," he said.

Nhora Otalora, Executive Director of Habour Partner, a company with $110 billion in assets, agreed. "There is still room for further correction in the valuation of companies. I believe what we will see is venture capital funds with more strength to negotiate lower asset prices and obtain larger stakes in companies," said the executive, adding that fundraising remains low due to the rise in interest rates worldwide and the lack of liquidity.

Ana Maury Aguilar, responsible for Corporate Innovation at AC Ventures, discussed the opportunities that the current scenario is opening up for Corporate Venture Capital. "This is a moment of great opportunities for CVCs to look at companies that have good fundamentals and are truly doing disruptive things," said the executive. According to her, funds have become more specialized, operating in niches, and there are major companies creating their own CVCs.

According to José Miguel Cortes, COO and Executive Partner at 1200 VC, if the capital-raising environment is challenging, it is excellent for allocating resources in the region. The American industry is very mature, and it is difficult to find interesting companies that have not undergone digitalization processes and have not incorporated technology into their operations. However, there are many opportunities in Latin America, he said.

Regulation and legal certainty in Venture Capital

Regulation needs to advance to meet the needs of Venture Capital investors. This was the conclusion of the panel on "Has the New Regulation Brought More Legal Certainty to VC Investors?"

Daniel Maeda, Superintendent of Institutional Investor Supervision at CVM, explained that the rules have been evolving over time, but there is a need for further progress to provide security to Venture Capital funds. "It's very important that the industry engages with CVM. It's on our radar, of course, but it's important for the industry to highlight the relevance and priority of the subject," he said.

Fabiana Fagundes, partner at FM/Derraik law firm, added that the Brazilian regulation does not fully address the reality of VCs, which has led many investors to seek other countries for their investments. She mentioned the example of mark-to-market valuation. "Both Venture Capital funds and Corporate Venture Capital funds are dealing with a major challenge, which is the accounting rule adopted for asset pricing in the portfolio," she said. "Even if there has been an increase in value between two or more investment rounds, there is no guarantee that this new value will be the same at the time of fund exit."

Maeda argued that mark-to-market brings transparency and provides information to unit holders about what is happening with the strategy. "But for the Venture Capital segment, given the diversification of the portfolio, this practice implies significant costs," he said.

Francisco Sanchez from Lions Trust pointed out that mark-to-market was a market demand, especially from pension funds. "It was a demand based on prevailing conditions at the time, which were private equity funds and who the investors were," he said. "I wouldn't generalize; having a specific focus on the Venture Capital industry would be important," he concluded.

Felipe Andrade, Managing Partner at DOMO Invest, added that an additional complexity in the discussion is the difficulty of valuing early-stage companies. "Valuations using different metrics will never match because there is great uncertainty regarding the growth value of these companies and the discount rate. We need to consider what makes sense to protect the unit holder and avoid creating confusion," he said.

Navigating the low liquidity scenario

The panel moderated by Phillipe Schlumpf, Venture Capitalist at Kinea, began with recommendations from Camila Sangali, partner at Igah Ventures, on how startups can navigate this challenging period. According to her, companies should avoid accessing capital as much as possible and take initiatives to make their capital last. "The first strategy is to focus on the core business and avoid testing new business models and products when you have little capital. Another interesting strategy is to attempt to reprice products and test demand elasticity. Lastly, it's important to maintain an open dialogue with investors, especially for those who cannot postpone fundraising. This is because fundraising rounds are taking longer to close, so preparation is necessary," she said.

Francisco Jardim, partner at SP Ventures, added, "Make pitches to show that the use of capital will be more efficient. Companies that demonstrate how they will survive in this environment become more attractive." According to the executive, those who can navigate this phase can emerge stronger. "The competitive environment for startups has become more favorable. There are fewer capitalized companies, which means fewer competitors."

Andre Glezer, co-founder of Agroland, shared his experience founding the company two years ago. "We had a more skeptical view that the market would become more difficult. In the past, companies adopted a very simple model: sacrificing profitability to grow rapidly. Our approach is to choose a profitable product, have few people in the company, and focus heavily on cash flow and execution," he said.

Karime Hajar, Investment Manager at BASF, agreed that there was a lot of enthusiasm to make businesses grow rapidly. "Now, CVC and VC funds are taking more time to analyze and conduct due diligence to create an investor syndicate, considering the complementarity of skills. Another significant change is the reduction in ticket sizes," said the executive.

AI and its impact on startups

The advancement of artificial intelligence has increasingly impacted companies and disrupted businesses. The discussion took place during the ninth session of the Brazilian Venture Capital Forum, moderated by Daniel Ibri, Co-founder/Managing Partner at Mindset Ventures.

According to Ana Martins, partner at Atlântico, this represents a paradigm shift that is here to stay and will accelerate as technology becomes more accessible. This is because new tools meet existing needs of both individuals and companies. "Until all companies and people adopt this technology in various processes, it takes time. Our role is to facilitate this adaptation as quickly, sustainably, and ethically as possible," she said.

"Large companies are slower to implement changes, but everyone wants to use generative artificial intelligence solutions because they unlock solutions, especially in text generation. However, this takes time," added Afonso Menegola, Cloud Solutions Architect at Microsoft.

Menegola also mentioned that startups are highly focused on the application of AI technology. "Startups are investing heavily in conversational AI, understanding how human interaction works to create chatbots using this technology," he said.


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