Matheus Tavares Dos Santos
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Despite the challenging fundraising environment of 2022, we saw more big corporations launching their corporate venture arms in Brazil last year than during the boom years of 2020 and 2021.
While the short-term impact of where we are in the market cycle has caused many founders to go into “survival mode,” these CVCs should be structurally advantageous for Brazil’s startup ecosystem, as it introduces a stable pool of medium-term dry powder that could reduce volatility.
That said, there aren’t that many CVCs in the Brazilian venture funding market compared to countries like the United States. Peter Seiffert of Valetec Capital, a CVC-focused asset manager in Brazil, estimated that CVCs account for just 5% to 10% of total venture deal volume, but said he expects these numbers to eventually grow to 25% to 30%.
Larger companies need to set up venture arms and embrace this style of investing, and that is exactly what happened last year.
The early majority is entering the CVC space
The financial sector has historically been an early adopter of new investing philosophies, so it isn’t very surprising that financial companies have led the charge in the corporate venture space.
Currently, financial companies make up about 20% of CVCs in Brazil, which is more than any other sector. This has resulted in a dynamic where the majority of the successful and mature startups in Brazil are fintechs.
Nonfinancial companies, on the other hand, have tended to fund or partner with third-party accelerators, venture capital firms and incubators without bringing those capabilities in-house. But this dynamic has been changing meaningfully in the past few years thanks to a new wave of CVCs sponsored by companies that have little to do with finance.
The list of companies that announced CVC-related programs in 2022 is impressive and includes the likes of Vivo, a subsidiary of the Spanish telecom company Telefonica; Vale, the largest producer of iron ore and nickel in the world; Anima, one of the largest higher education companies in Brazil, and Suzano, one of the biggest paper and pulp producers in the world.
We can see that while it’s not an entirely new concept, having a CVC-type initiative has become more mainstream for companies across sectors and is sometimes even seen as a prerequisite for staying competitive in the long term.
Alternative financing solutions are emerging
In parallel to this influx of new CVC arms, financial institutions that have a more mature presence in the startup ecosystem have begun to innovate their offerings and strategies to enter new, less explored areas where they can be the “early adopters” once again.
For example, Itau Unibanco, the largest bank in LATAM by assets, has launched a venture debt fund; XP Investments raised about $177 million through crowdfunding to invest in startups; the Brazilian Stock Exchange has launched a $116 million venture builder initiative; and BTG Pactual’s BoostLAB will invest in startups selected for its accelerator this year onward.
These moves make it clear the CVC space is expanding in breadth and depth as the range of institutional investing solutions increases and more diverse companies enter the fray.
The path forward is not linear
Despite the potential for growth, it is important to acknowledge that there are risks ahead.
First, given the lengthy process that most corporations have to negotiate to approve new initiatives, it is important to recognize that a substantial share of the companies that launched their CVC initiatives in 2022 had actually started preparatory work months earlier, when the startup funding market was booming.
For example, Renner, one of the largest retailers in Brazil, launched its CVC arm in the first quarter of 2022, but it had been conducting studies, including performing over 30 benchmarks both within Brazil and abroad, since March 2021, which was one of the busiest quarters for CVC funding in Brazilian history.
In addition, most CVCs in Brazil are very new: more than 50% of CVCs in the country launched in the past three years and haven’t exited an investment yet. Many have never been through an entire investment cycle and so haven’t had a chance to see if their mandate was achieved or not. As a result, before the space matures, we will likely see projects being shut down.
Moreover, CVC dry powder does not necessarily translate into capital deployment during downturns. That became clear in 2022, when CVC funding volumes decreased at a similar pace as venture capital in the U.S. This is even more relevant in Brazil, as CVCs here are still very incipient and more sensitive to the broader macro environment.
The institutionalization of Brazil’s venture funding market is definitely a burgeoning trend, and as the space matures, the path forward will inevitably have highs and lows. But if the new CVC initiatives and companies providing alternative sources of financing can be successful in executing their mandates, the path should, at least, be less bumpy.
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