10 things to know about tech startups in Brazil

Sao Paulo, BrazilCompared to Mexico, the web and mobile startup ecosystem in Brazil is hot — probably too hot.

There seem to be almost as many foreign entrepreneurs and investors — Americans, Germans, Spanish — looking for opportunities to make money in Brazil as there are Brazilians building companies and investing.

Brazil’s booming economy and its population’s interest in new web and mobile services (hello, e-commerce) make it a market that’s already exploding.

But the challenges are many — the taxes are ridiculously high, the traffic is non-stop and crime is rampant in Brazil’s big cities like Sao Paulo and Rio. I’ve experienced these all first-hand as I’ve been traveling with the Geeks on a Plane group through Latin America this week.

Here are 10 things you should know if you want to build, buy, invest in or work at a tech startup in Brazil…

1). Whoa, taxes!: It’s one thing to complain about Brazil’s high taxes, but it’s another to crunch the numbers and see the real differences. Brazilian entrepreneurs told our group that it’s not uncommon to pay about 100 percent to 120 percent in taxes on things like employee salaries, company revenues and goods and services. So, for example, a startup hiring a new top notch engineer or exec could typically pay in the $300,000 range including taxes. The same types of taxes go for buying gadgets and goods — the iPhone costs around $1,000 here. If you want to do business in Brazil, this is just the reality, so get ready to spend.

Entrepreneurs in the region are worried that the economy will stop growing so fast if the government doesn’t become more business friendly. For example, all employees have to be members of unions.

2). e-Commerce is booming: E-commerce in Brazil is like if one morning everyone woke up with a broadband line, a new credit card, disposable income and a desire to spend, according to local entrepreneurs. And there is also tons of room for growth. Out of the 200 million population, 34 percent of Brazilians have internet access. And there are projected to be 15.4 million smart phones sold in 2012. Some of the top (and growing) e-commerce sites in Brazil include Peixeurbano, Netshoes.com.brNova Pontocom, and B2W. Investor Niklas Zennstrom, who founded Skype and Kazaa, told me that e-commerce is what’s working for web startups in Brazil.

3). Here come the clones: Like most new international markets that are rising after the initial internet boom in the U.S., a lot of sites are looking to copy the e-commerce models of the U.S.. Entrepreneurs regularly exclaim their companies as “the Groupon of Brazil,” “the Zappos of Brazil” or the “Amazon of Brazil.” Foreign entrepreneurs are moving to Brazil to start these types of companies, too. It’s a natural way to create the web here — look for what has worked before. Others, like Zennstrom, are hoping that, some day soon, there will be more original and uniquely Brazilian e-commerce ideas.

4). Close to a bubble: Entrepreneurs building web businesses in Brazil say that the Brazilian tech startup market is “dangerously close to being a bubble”, because of the large influx of entrepreneurs and capital going into the market.

5). Infrastructure problems: Brazil’s economy and population are growing so fast, particularly in cities, that there is a real problem with infrastructure. The Geeks on a Plane group spent hours in traffic commuting to get to meetings with startups and investors. Entrepreneurs told us that their employees regularly start working much later hours because the traffic is so bad.

6). It’s cool to be Brazilian: Adding to the potential of a bubble, there is the cool factor of setting up and building a tech startup in Brazil. Back in 2006 and 2007, entrepreneurs say, Brazil was just another South American country. But now Brazilian companies are starting to be seen as hip, cool and novel. That will only grow, with the Olympics and the World Cup both set in Brazil in the coming years.

7). Equity uncommon: It’s not that common in Brazil to offer new members of tech companies equity in their companies. Entrepreneurs say, legally, it’s very complicated to set up the equity structure, and Brazilians also aren’t asking their companies for shares when they join — they prefer cash up front to shares. But the downside of that is that when there’s some blockbuster exit, like a Facebook IPO or when eBay bought PayPal, there won’t be a new wave of angel investors created, like there were for PayPal.

8). Economic changes in Brazil: While well-off consumers make up a large portion of the e-commerce boom in Brazil, the economics of Brazil are actually changing and the middle to lower class of consumers is quickly rising. Seven years ago, people that earned up to $1,000 a year made up a large percentage of the population but not of the consumer population with a disposable income. But that’s changing and increasingly this group of consumers is becoming much larger. The future of e-commerce and mobile startups will lie with this population.

9). Basic phones to smart phones: Mobile-focused entrepreneurs say that the growing power of the smart phone in Brazil is an important trend. While only 14 percent of cell phones in Brazil are currently smart, smart phone penetration is growing rapidly and smart phone owners are actually buying a lot of things on their phones.

10). Foreigners in Brazil: Many of the startups in Brazil are being created, and invested in, by non-Brazilians. At this point, the Brazilians don’t necessarily seem to mind, according to many of the entrepreneurs. Companies run by Americans or the Dutch are seen as interesting, not as a threat to the local Brazilian population. The trend just continues the multi-cultural aspect of Brazil’s cities like Sao Paulo. Down the road, I could see that changing.

Image courtesy of JorgeBrazil.