01:00 AM

Lessons On Downturns From Brazilian Entrepreneurs

Brazil's startup founders have had to deal with numerous recessions, political volatility and other crises - but continue to improve and produce unicorns.

Brazilian startups survive tough times

Photo: Paulista Avenue, São Paulo, Brazil.

Guest post By Eduardo Henriques, Movile Group co-founder and Wavy CEO

In the rainforests of Brazil, the incredible diversity of competing life forms includes the fire ant — a species that has learned to survive the most catastrophic floods by creating waterproof rafts of living ant bodies hooked together to trap air bubbles and keep their queen and larvae dry until a new site for the colony is found. A lone ant would quickly drown, but a community of ants helps each other survive.

This example of fire ants at work in Brazil’s natural ecosystem provides insights into a new model for startups that has worked well around the globe: a tech innovation and VC ecosystem composed of compatible and synergistic startups that are able to help each other survive downturns and setbacks of all kinds - and grow even faster as a collective during boom times.

It’s an approach to investing and new founder services that are being offered by smart VC funds on the ground in Brazil from around the world. It works well during good and bad times. This new approach is helping to establish Brazil as the red-hot forge of Latin America’s booming innovation economy with a dozen Brazilian startups out of 17 in Latin America today. Together, they represent the region’s most valuable companies. And, there are more of them on the way.

Even Mary Meeker, in her annual Internet Trends report, has started to include data on Latin America’s startups and the many market opportunities from a young and very tech-savvy population with a growing middle class that largely lives in massive urban areas such as the Brazilian cities of Florianópolis, São Paulo – or Sampa, as it’s often called, and Rio de Janeiro.

Advice for building fast-growth startups

Back in the early 2000s, Brazil was “unfriendly to technology entrepreneurs,” as my longtime friend and Movile co-founder Fabricio Bloisi describes it: 

“There was an incredible amount of bureaucracy that made starting and operating a business difficult in Brazil. The World Bank ranked Brazil 120 out of 187 countries for ease of doing business and 167 out of 187 for ease of starting a business. It was very difficult to grant stock options to employees and in the early 2000s, there was very little venture funding available for young organizations.” 

Times have improved, despite very tough economic conditions. Brazil’s startups know how to grow during tough downturns, far tougher than in North American and European economies. 

However, startups around the globe - from China to Silicon Valley to Europe - have had little experience with economic downturns; the most recent being about 12 years ago in 2008.

Economic downturns for Brazil's startups have come around more often and they are much deeper. In 2015, a savage, two-year recession cut Brazil’s GDP by a massive seven percent. And signs of an improving economy in 2020 could now be delayed or even completely derailed by the fallout from the coronavirus pandemic and the recent oil crisis.

This type of harsh investing environment requires Brazilian entrepreneurs to be frugal and smart about how to best use their investment capital. 

[Brazil's now vigorous startup sector has produced 12 unicorns out of 17 for the whole of Latin America at end of 2019.]

I remember in the 2008 crisis reading the infamous Sequoia Capital "R.I.P. Good Times" letter. We made a huge restructuring in the company and laid off about 30 percent of our people. It was a tough decision but we learned an important lesson about how to survive in tough times. 

Recently, Sequoia issued a warning to its portfolio startups that the coronavirus is “The Black Swan of 2020”. It looks like tough times for entrepreneurs are ahead but we know what to do. 

Here are some valuable lessons that we “fire ants” have learned from surviving downturns, recessions and other setbacks: 

Success Doesn’t Follow a Straight Path 

Over two decades, we have learned that success does not follow a straight line. Instead, it’s a messy squiggle, with ups and downs, sleepless nights, and a constant rethinking of strategy and planning in order to grow into a unicorn or a global company.

Silicon Valley founders are well versed in the concepts of fast failing and the lean startup methodology. That’s because the culture in Silicon Valley allows a quick recovery from failure.

Culturally, Brazilians are not wired for failure. We hate it. But in Silicon Valley, starting a business is generally a badge of honor -- even if it does not succeed in the end. 

When you’re not afraid to fail fast, you learn important entrepreneurial lessons more quickly, and you can move on to your next venture and apply what you’ve learned. You become successful by using the lessons of your failures. This is what we’ve tried to apply internally in terms of developing new ideas within organizations.

When startups mature and teams become much larger, we call them "cruise ships” or “transatlantic ships.” They are cash cows that demand perfectionism and greater efficiency. The lean startup approach is a smart way to continuously test out a vision, and market test products and services based on whether a sustainable business can be built around them, or not.

We have integrated this approach into a development program called “Jet Skis” - wherein we, as a company, vote on the most important initiatives, and then unleash a small team with cross-functional expertise to focus on that, fully, with a high degree of autonomy. 

If a Jet Ski project shows early success, we turn it into a “Speed Boat” and add more people and resources. If a Jet Ski fails, we lose little money and a little time, and we always learn something from the failure.

Invest In Culture, Dream Big, Control Costs and Be Ready to M&A

We have learned a lot from Anheuser-Busch InBev (AB InBev) the world’s largest brewing company. It was created by Jorge Paulo Lemann, a Swiss Brazilian businessman who now ranks as Forbes’ 35th richest person in the world and is the richest man in Brazil. Lemann merged two Brazilian breweries and added further companies through savvy mergers and acquisitions managed by his private equity firm GP Investimentos.

The lessons from AB InBev are in the disciplined management and control of costs, and the management process it uses to pursue very aggressive goals.

AB InBev invested heavily in building a strong culture described in an AB InBev case study, as “the establishment of an intense meritocracy, and a radical informality and openness symbolized by the smashing down of executives’ office walls to have them work side-by-side at large tables, their metrics posted publicly for all to see.” 

Merging two companies together successfully is very hard to do. Harvard Business Review discovered that most corporate mergers and acquisitions fail (between 70 and 90 percent). 

After making more than 40 acquisitions in 12 years, one of the most important lessons on making a success out of corporate mergers is to focus on the cultural fit between the two companies. It’s important to perform a deep analysis of company cultures as part of due diligence. The ones that have the most alignment are always the ones that work out the best.

-- It’s essential to be very critical and realistic about any synergies and how long it will take. At Movile Group, we call it “facing the brutal facts,” and it’s better to do this early in the evaluation of the merger. 

-- We spend a lot of time on cultural integration and building new traditions and processes together. We always create a detailed 100-day plan for those integrations which helps ensure that everyone is on the same page with that plan. 

-- An ambitious culture is not just about commercial gains — it’s fundamentally about improving the world. The most impactful way to attract the best talent is to have hard problems to solve and ones that could make a positive impact on a massive scale. The startups with the best cultures will always have less trouble recruiting top talent and will have far less staff turnover.

-- Also, we found that we do not need to consider competitors as enemies because they can become important partners allowing faster growth strategies. 

Hopefully, such lessons can help startup founders prepare for, and survive any setbacks during this time of global economic uncertainty in the weeks and months ahead. 

- - -

Eduardo Henrique is CEO of Wavy and co-founder of Movile Group, a leading ecosystem of technology companies in Latin America with a big dream to make life better for more than one billion people through its apps.