The Current State of Venture Capital in Brazil
A review of the venture capital (VC) space in Brazil from Pedro Chueiri and Guilherme Potenza, partners at Bronstein, Zilberberg, Chueiri & Potenza Advogados.
Three key areas are covered in this Expert Focus presentation:
- VC involving Brazilian operational companies; in particular, the forms that investment has historically taken and the most popular ones today.
- The “flip” – ie, the corporate control of a Brazilian entity being transferred to another jurisdiction, typically through Delaware and the Cayman Islands.
- The current state of the VC business in Brazil and some hot topics, including Silicon Valley Bank, “unicorns” and down rounds.
How to Invest in a Brazilian Company
When investing in Brazil, especially in early-stage companies, investors prefer debt to equity to avoid risk; usually in the form of convertible loans or bonds.
“Bonds were initially used by funds when testing the waters ten years ago, today convertible loans are far more common.”
When equity structures are used for investments in Brazil, share purchase agreements (SPAs) are typically used. If the structure is already flipped, the documentation will follow the National Venture Capital Association (NVCA) model.
“Brazilian entrepreneurs actually require that these models are used to cut costs and ensure that investors in future rounds know precisely what they are getting into.”
The Flip
The typical offshore structure is the “Cayman sandwich”: a holding company at the Cayman level, a Delaware limited liability company as an intermediate entity and a Brazilian operational company.
The key drivers for this structure are risk and access to funds. Potential political and legal instability in Brazil can worry foreign investors; changes to tax and labour law and regulations can affect funds and VC is particularly exposed to such changes because of the lack of corporate/management control that VC funds have in comparison, for example, to private equity firms.
In addition, if a VC is willing to sell to a foreign strategic investor or looking to list on a foreign exchange, being structured in the Cayman Islands will make exiting easier. There are also tax efficiencies for foreign funds investing and exiting at the Cayman level.
Key Current Trends
The key recent story in Brazilian VC is, of course, the failure of Silicon Valley Bank (SVB). This affected not only start-ups but also some funds, as well as individuals who had invested the proceeds of successful sales in the bank. No champion has yet emerged in SVB’s absence as the go-to bank for Latin American start-ups.
Although numbers were down compared to the very atypical 2021 (VC investment in Latin America fell by around 50% YoY), 2022 was the second best ever year for VC in Brazil. At the start of 2023, the market may be picking up again with up or flat rounds (with a few tweaks) rather than down rounds being seen.
Bronstein, Zilberberg, Chueiri & Potenza Advogados
