Numerous young companies have struggled to show sustainable profitability despite early rapid growth. Some blame the business environment and the costs of doing business such as legal costs, taxes, employment costs and a lack of logistics infrastructure, which combined make operations more difficult. The fact that GDP growth slowed last year to 0.9%, compared with 2.7% in 2011 has not helped entrepreneurs either.
Initially, most investments made by foreign venture capital firms consisted of Brazilian Internet or technology companies looking to replicate existing web business models that proved to be successful in the United States or Europe. Investors wrongly assumed that the Brazilian market was large enough to support multiple successful companies. Consequently, the market was flooded with excessive competition for limited market share. However, other investors point to inefficiencies on the execution and operations of companies as the main reason for their poor performance.
Despite the difficult environment, Brazilian start-ups still have foreign supporters. Even Silicon Valley investors who have seen ideas fail are still willing to make large bets, believing that the short term will be difficult, but the long-term projections remain highly favorable, as the market grows and consumer purchasing power increases.
According to the Brazilian consulting firm E-bit, overall e-commerce grew by 20% in 2012 and mobile represented only 2.5% of transactions, making mobile e-commerce the next big opportunity for growth. Other sectors in Brazil that remain overlooked and underfinanced but are starting to see more investments are health care, education and innovation.
We also note the growing interest of Chinese Internet companies looking to duplicate in Brazil the same success that they’ve had in China.
Overall, as move closer to the World Cup and Olympics, the country show signs of above average GDP growth and the mood for foreign investors still remains positive and more FDI is expected the next 3-5 years to further empower the growth of the Brazilian economy.