Brazil has been hit especially hard by the COVID-19 pandemic, and the crisis is changing every aspect of society. Now that the most obvious and immediate effects have set in, we are beginning to see what the mid- and long-term consequences will be in the country.
I strongly believe that fintech will be one of the sectors that will emerge from this crisis both reinvigorated and transformed. As a fintech entrepreneur, you have the chance to rebuild a better Brazil.
Transforming uncertainty into new opportunity
It’s not a surprise that the macro landscape looks grim right now. The economy is expected to contract around 9 percent this year, and although analysts predict a positive rebound next year, the main players in the financial sector are still in shock. As a consequence of increased payment deferrals for loans, the current level of non-performing loans is unknown and financial institutions are navigating in the dark. The CEO of Itau referred to their strategy around managing these loans as “more an art than science.” I cannot find a better phrase to describe the current situation of the traditional financial sector. Amid all of this uncertainty, it is clear that fintech players will be better positioned to recover from the economic downturn if they can use alternative data sources to access updated financial information.
Those tech companies who already have access to real-time data will have an added advantage due to an open banking regulation released by The Central Bank of Brazil, which will be fully implemented next year. In addition to the data they already have, fintechs will benefit from accessing additional information from their clients that allows them to provide a better, more personalized service. At the same time, the opportunities for fintechs to partner with banks will increase as banks seek to connect to third party providers and enrich their businesses.
But negatively hit sectors aren’t the only place where tech startups can find opportunities to offer financial services to the underserved. For example, agriculture is posting record results, and some industries within the gig economy, like last-mile delivery, are also growing more than ever before. There is a huge potential to layer digital financial services in these and other thriving sectors.
Data is king
Fintech companies are in an advantageous position when they have rich and timely data needed to make the right business decisions. And those data-driven companies that build strong relationships with customers by solving problems that aren’t financial — before embedding fintech solutions — are in an even better position. In the past, we have explored how super-platform tech companies are doing this, and now this approach is expanding across multiple sectors. For example:
- Terra Magna has spent years building a huge database of farming regions and crop performance using high-tech satellite images. With a unique knowledge of the business, it is now starting to provide responsible financing to farmers.
- Loopa is a startup that provides a free platform to MSMEs for credit card reconciliation, allowing them to have a better understanding of their business and solve cashflow inefficiencies. That type of relationship with customers is the one that provides infinite possibilities to add financial services.
- Finally, SmartMEI, one of our portfolio companies, is building solutions for the future of work. They understand the needs of a workforce that is changing every day and have built targeted financial products for an evolving workplace. The company started by providing simplified accounting services and has grown to offer a full suite of products.
But who is investing right now?
At the onset of the pandemic, capital immediately dried up for entrepreneurs. Many investors had to concentrate their efforts on helping their portfolio companies stay afloat, and others were too wary of the situation to keep investing. As Nigel Morris, partner of QED Capital, recently said in an episode of VentureKast, “We are going to see fewer tourists involved in VC in the fintech space.” The ones that will keep betting on the sector — and that have already restarted actively investing — are the true fintech specialists.
So, the big question is: who should you pitch your startup to in Brazil? Many great investors come to mind. This complete cheat sheet recently published in Contxto lists some of the most active equity investors divided by industry and stage.
Don’t miss the chance to grow your startup, with some caution
The pandemic, despite all its negative connotations, is creating a temporary blue ocean for many fintechs. Now may be an excellent moment to fundraise and accelerate growth, but you should consider a few things before doing so:
- Don’t be afraid to be selective. Choose your customers wisely and make good use of your data collection and analysis capabilities.
- Mind your unit economics. This is a moment to grow, but definitely not at all costs. Bear in mind that this is a time ruled by uncertainty. The less you burn, the more runway to have to survive through the storm. VCs are certainly looking at this before investing.
- Valuations are coming down. Early-stage valuations in Brazil reached astronomical levels in recent years, and now it’s not uncommon to see up to 30 percent cuts. Believe it or not, this could be a good thing for your startup as you can align incentives with your investors and reduce the risk of a down round in later stages.
- Banks will catch up. This blue ocean won’t last forever, and open banking will facilitate access to information for all players. Start preparing for what will come after COVID-19, whether or not you work directly with banks.
Accion Venture Lab is here to help the ecosystem grow
Accion Venture Lab’s mission is to support innovative companies that help the financially underserved. We are always working to grow the fintech ecosystem — even outside our portfolio. This the first in a series of blog posts and webinars we will be hosting in the coming months, made possible by support from FedEx, to help the Brazilian fintech ecosystem thrive through the COVID-19 crisis. We invite you to follow along and reach out if there is any way we can support you.