Brazil IPO Boom: Startup Market Acceleration

Brazil's Startup Surge and its Impact on the Stock Market

The Brazilian startup landscape is experiencing significant growth, potentially benefiting the nation’s stock market.

Recent data from KPMG reveals that Brazilian startups secured record levels of funding in the first quarter of 2021, attracting $1.4 billion in investment. This benchmark was then surpassed in the subsequent quarter, with startups raising an impressive $2.7 billion.

Startup Activity: Funding and Acquisitions

While investment inflows are crucial, they represent only one aspect of the startup ecosystem. Brazil has also witnessed a rise in startup acquisitions.

Notable examples include Twilio’s acquisition of Teravoz in January 2020, and Etsy’s purchase of Elo7 for over $200 million in June of the same year. Furthermore, Magazine Luiza invested $528 million to acquire Kabum, a prominent Brazilian e-commerce platform, earlier this year.

The Growing IPO Market

Initial Public Offerings (IPOs) provide another avenue for liquidity. Brazil’s domestic stock exchange, the B3 located in São Paulo, has historically seen limited technology IPOs.

However, indications suggest that this is changing, with a potential increase in IPO volume for Brazilian tech startups.

GetNinjas, a platform connecting users with local service providers for tasks like plumbing and painting, successfully went public on the B3 exchange earlier this year.

A Shift in IPO Numbers

Data highlights a clear trend in the Brazilian IPO market.

Prior to 2020, only two out of 56 IPOs in Brazil involved technology companies. This number has significantly increased, with at least 16 technology companies now listed, compared to just four in 2019.

Future IPO Destinations: Domestic vs. U.S.

A key question arises regarding the future of Brazilian tech company IPOs.

Will the trend of domestic listings continue, or will U.S. exchanges remain the preferred route for the country’s leading startups?

This is particularly relevant given that São Paulo-based fintech giant Nubank is preparing for a public offering, and unprecedented capital is being invested in the current generation of Brazilian startups, all seeking viable exit strategies.

The Rise of Unicorns and New Funding

Brazil is also experiencing a surge in unicorn companies – startups valued at over $1 billion – with at least four achieving this status this year.

Recent data indicates even this figure is quickly becoming outdated. Nuvemshop, a Brazilian e-commerce company, just announced a $500 million funding round, resulting in a valuation exceeding $3 billion.

Insights from Industry Leaders

To gain a deeper understanding of the expanding number of domestically listed Brazilian technology companies, and to explore future possibilities for the country’s startups, The Exchange consulted with Eduardo L’Hotellier, CEO of GetNinjas, regarding their IPO experience.

Additionally, insights were gathered from Renata Quintini of Renegade Partners, a venture capital firm, to assess the current state of the Brazilian startup landscape. Data will be utilized throughout this exploration of Brazil’s dynamic startup ecosystem.

Factors Fueling the Increase in Technology IPOs in Brazil

The overall number of publicly traded companies in Brazil remains below historical peaks, influenced by both industry-specific conditions and broader economic forces. Examining the surge in technology IPOs within Brazil necessitates consideration of both overarching macroeconomic factors and developments specific to the technology sector.

Globally observed trends driving venture capital funding for technology startups are equally applicable to Brazil. As Nathan Lustig from Magma Partners explained to The Exchange earlier this year, historically low interest rates are contributing to increased venture investment in Brazil. Simultaneously, startups are experiencing accelerated growth as digital technologies become increasingly integrated into everyday life.

Reduced interest rates redirect capital towards higher-risk investments, shifting funds away from traditional assets like bonds and commodities and into areas such as venture capital. It’s important to remember that Brazil has historically maintained relatively high interest rates, making the current financial climate particularly noteworthy. Following the onset of COVID-19, the cost of borrowing money in Brazil reached a multidecade low, coinciding with a period of elevated inflation.

Greater capital availability can facilitate faster growth for startups, naturally resulting in a larger number of companies reaching IPO readiness over time.

However, the situation extends beyond mere shifts in capital allocation and favorable trends like an accelerating digital transformation.

A significant contributing factor is the expansion of the domestic retail investor base, which grew from under 2 million in February 2020 to nearly 4 million by last June, and demonstrates a greater willingness to invest in local startups. During a recent presentation (in Portuguese), Rafaela Vesterman Araujo of B3’s private equity and venture capital division highlighted that the pandemic spurred the digital evolution of businesses, enhancing investor understanding and reducing their apprehension towards tech startups.

“Investors now possess a clear understanding and confidence in the long-term potential of these technology companies,” Quintini added.

This shift has created an “increased demand for ownership in rapidly expanding technology companies,” Quintini conveyed to TechCrunch, consequently altering the valuation of domestic tech firms. Improved public market valuations for technology stocks create a more favorable environment for tech companies considering listings, addressing a common concern about surpassing previous valuation benchmarks during capital raises or exits.

Current Brazilian technology IPOs are capitalizing on established global trends while also benefiting from unique domestic advantages.

Focusing on the dynamics within the Brazilian technology industry, the market is demonstrating increasing maturity. The growing number of unicorns serves as one indicator of this progress, as does SoftBank’s continued investment in the country. Positive developments may be forthcoming for Brazil’s startup ecosystem, as recent public offerings could stimulate increased merger and acquisition (M&A) activity.

According to L’Hotellier, several venture-backed companies in Brazil may not pursue IPOs directly but represent attractive “acquisition targets” for publicly traded tech companies within the country. He emphasized that these acquisitions can generate returns for venture capital investors. These successful exits, in turn, can recirculate capital back into the Brazilian technology sector.

Web services provider Locaweb exemplifies this trend: it became the first Brazilian tech company to IPO on the B3 stock exchange since 2013 in February 2020 and has since engaged in a series of acquisitions. With some of these CEOs now acting as angel investors, and Locaweb serving as a model for other IPOs, a positive feedback loop is clearly established.

Therefore, IPOs represent more than just liquidity events for technology companies and their investors in Brazil; they also serve as a mechanism to unlock capital invested in other startups, facilitating greater domestic fund flow. This, over time, should encourage the creation of more technology startups, ultimately leading to further IPOs.

For B3, which currently lists only a few hundred companies, an influx of technology offerings could significantly expand its overall company index.

Brazilian Tech Companies: A Look at IPO Trends

The increasing number of technology companies being listed in Brazil signals positive momentum for both the nation’s startup ecosystem and its stock market platforms. However, it’s important to recognize that not every Brazilian tech firm that reaches maturity will choose to remain exclusively within the domestic market when pursuing an initial public offering.

The practice of Brazilian companies listing on U.S. exchanges is not novel, but it experienced a surge to unprecedented levels in 2021. Over the past five years, these companies have collectively secured nearly $9 billion through 13 IPOs in the United States, excluding instances of dual listings, as reported by Valor.

Notable Companies and B3’s Perspective

Nubank, widely recognized as a prominent success story within Brazil’s burgeoning startup landscape, is currently evaluating the possibility of a U.S. IPO. Furthermore, other technology companies – including CI&T, Hotmart, Conductor, and Elo – are also reportedly considering similar moves, according to Valor.

Brazil’s stock exchange, B3, is actively working to encourage companies to consider dual listings. CEO Gilson Finkelsztain, in a recent interview, expressed the belief that listing both domestically and internationally could offer the most advantageous outcome for these businesses.

He stated, “Our goal is to demonstrate to companies that the optimal strategy may be to list on foreign exchanges simultaneously with a listing here,” as translated by TechCrunch.

Factors Influencing IPO Decisions

The extent to which dual listings become commonplace will be influenced by Brazil’s overall economic and political climate. Indeed, the second quarter of 2021 saw a slowdown compared to the first three months of the year, a point acknowledged by Finkelsztain in May.

This deceleration was attributed to factors such as “a resurgence of COVID-19 cases, leading to increased hospitalizations and fatalities, alongside economic restrictions and significant political instability.” Despite these challenges, he maintained a hopeful outlook for IPO activity in the third quarter.

The upcoming quarter promises to be particularly noteworthy, as several potential IPO candidates initially paused their applications, only to later proceed with more scaled-back plans.

Future Prospects for Brazilian Tech IPOs

Despite challenges, compelling reasons remain for Brazilian technology firms to consider initial public offerings (IPOs) within Brazil itself. A key advantage lies in the increased visibility they are likely to receive domestically.

According to Quintini, many Brazilian unicorns would benefit more from being a prominent entity on the B3 exchange rather than a relatively smaller player on the larger Nasdaq or NYSE.

L’Hotellier shares this perspective, emphasizing the long-term benefits of heightened attention. He suggests that even a potential discount on the initial listing is worthwhile to attract significant funds to the company’s capitalization table.

This increased visibility, he explains, ultimately enhances the company’s value over the medium to long term, a benefit that smaller U.S. companies may find difficult to replicate.

Several startups are already preparing to emulate GetNinjas’ successful IPO. L’Hotellier notes a consistent flow of inquiries from founders backed by Monashees and Kaszek, indicating a sustained interest in domestic listings.

This ongoing engagement suggests a potentially lengthy period of Brazilian companies prioritizing local IPOs. These companies have the potential to alter the current valuation discrepancies observed in the Brazilian stock market.

Quintini highlights the significant value yet to be realized by technology companies in Brazil. She points to the substantial representation of companies like Apple, Microsoft, Amazon, Alphabet, and Facebook – exceeding 20% – within the S&P 500, a figure that currently stands in the “low single-digit percentage” on the B3.

A shift is anticipated, as Quintini predicts the emergence of numerous high-caliber tech companies in Brazil. These firms, led by experienced teams and possessing compelling narratives, are poised to attract the interest and investment of Brazilian public market participants.

Such a development would have a wider impact, extending beyond mergers and acquisitions and the reinvestment of capital. It would also enhance the overall appeal of tech startups as viable investment opportunities.

Quintini believes it will demonstrate the rewards associated with investing in the inherently riskier startup landscape. L’Hotellier echoes this sentiment, suggesting that developers will be motivated by the prospect of contributing to a company that ultimately achieves a public listing.