Brazilian startup boom cools down and layoffs exceed 3,000, survey shows

In the last decade, investments in startups in Brazil grew more than 60 times, reflecting a scenario of generous capital supply, technological and regulatory innovation, in addition to the rapid penetration of online services, catalyzed by the pandemic.

Last year, this industry poured US$ 9.4 billion into the country, according to the analysis platform Distrito. This year, however, with central banks around the world leaving the stimulus of the last two years to start containing the biggest surge in inflation in four decades, entrepreneurs are having to temper ambitions to preserve cash, which in many cases has involved cutting back on meat.

According to layoffsbrasil.com, a site created to relocate technology professionals, there are already more than 3,000 layoffs in the sector in 2022 in Brazil.

The cuts included icons such as digital real estate QuintoAndar, automotive portal Kavak, e-commerce platform VTEX, fintech Ebanx and cryptocurrency broker Mercado Bitcoin, just to name a few unicorns, as startups valued at at least US$ are known. 1 billion, in addition to the retailer Americanas, strong in ecommerce and with a fintech arm.

For experts in the venture capital industry, this cycle of adjustments should last about two years, when a reversal of the increase in the cost of money is expected, a worsening that has recently made large international funds up the bar after injecting hundreds of billions of dollars. in technology-based businesses around the world.

According to analyst firm CBInsights, global investments in startups in the first quarter around the world totaled $143.9 billion, down 19% from the previous quarter, the biggest sequential loss in nearly a decade. In Brazil, the US$ 1.5 billion raised from January to March was the third quarter in a row down, after having reached a peak of US$ 4.8 billion in the second quarter of last year.

“Market dynamics have changed; Now, before accepting to contribute more resources, investors want proof that the business is sustainable in the long term and that there is a perspective of cash generation”, said Gueitiro Genso, former president of PicPay digital wallet and advisor on startups.

Excessive “Disruption”

According to Álvaro Gonçalves, a partner at Stratus and a veteran of the venture capital industry in the country, the resizing of the business is in part positive, as it shows that entrepreneurs are quickly adjusting to the new scenario, doing what is necessary to support the business.

But it also shows that the combination of an abundance of capital with entrepreneurs seeing a chance to win over established rivals with relatively simple business models has led to some excesses, he says.

With the urge to “disrupt”, a term that has become frequent in the environment as a synonym for changing the dynamics of markets dominated by traditional names or highly fragmented sectors, startups of young entrepreneurs, many with training in large North American universities, began to receive increasing volumes of resources in ever shorter cycles.

Thus, instead of the standard average period of 18 to 24 months, the intervals between rounds were shortened, reaching up to 3 months in some cases.

The digital human resources platform Gupy, for example, received at the end of January an investment of R$500 million led by SoftBank and Riverwood, an amount 12 times greater than the previous round that took place just seven months earlier.

According to experts, this was accelerated in part by the need for hedge fund managers to meet resource allocation goals.

“Investment began to arrive even for startups that proposed to solve problems that do not exist or with business plans without consistency”, said Gonçalves.

Eldorado

A segment that promised to be the new El Dorado for startups, grocery deliveries, saw the emergence of a myriad of business models and is one of those undergoing the strongest correction in Brazil, as is also the case in other countries.

Around here, this coveted market, but with compressed margins, numerous logistical problems, difficulties in gaining scale and very sensitive to customer complaints, saw alternative projects encounter even greater challenges than they imagined.

Favo, which emerged in 2019, proposed a shopping community in which registered people would be paid to deliver orders to neighbors’ homes. The startup received BRL 141 million from investors last October. This month, it ended operations in the country, with the dismissal of 175 people.

The digital supermarket Facily, had already accumulated more than 150 thousand complaints for delays in the delivery of products and lack of reimbursement when it received US$ 135 million at the end of 2021. It recently announced adjustments in the business, made 170 layoffs and committed to reducing complaints by 80%.

According to Facily’s director of public policies, Igor Cordeiro, most customers are having their first experience with online shopping with the company.

Now, e-commerce and financial services businesses, which have received the largest volumes of investment in the sector in recent years, are the biggest candidates to undergo a consolidation process, experts say.

In a report published last week, Fitch predicted that the focus of fintechs would shift to customer retention and cross-selling, with the strongest in capital increasing market share by buying smaller rivals.

No memory space

“Historically, in economically challenging environments like the current one, consolidations have taken place in various industries, and the best prepared and capitalized participants have benefited,” said Nubank founder and chief executive David Vélez, adding that the bank is on the lookout for opportunities for Fusions and acquisitions. “There is no room for 40 different digital banks on the same smartphone.”

And even giants that until a few months ago focused on the accelerated organic expansion of the base, changed the tone, in an effort to show the market that they can be profitable and will overcome difficulties.

Mercado Livre, the largest e-commerce and financial services portal in Latin America, since 2021 has prioritized profit and has multiplied product launches to monetize a base of 36 million customers in Brazil.

“More than ever, having cash is important and we are well positioned to get through this moment,” the vice president of Mercado Pago, the group’s fintech, told Reuters.

Despite the recent slowdown, analysts believe that the escalation of investments in innovation in Brazil is positive as it induces greater competitiveness and the search for efficiency in various sectors of the economy.

“The positive legacy generated in recent years will be maintained in the long term, once the route has been corrected”, said Thiago Favero, from the analysis platform Distrito, adding that investment in startups remains high in Brazil.