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NYT: Brazil Steps Up Investments in Overlooked Tech Start-Ups

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New York Times - André Vieira - 12/06/2012

RIO DE JANEIRO — For the last few years, Brazilian start-ups have begun to successfully draw blue-chip Silicon Valley venture firms. But in the process, promising technology segments have been ignored.

Although private firms are readily investing in e-commerce and other hot areas, fields like nanotechnology, robotics and information technology — considered critical to transforming Brazil’s commodity-export, consumption-dependent economy — are falling by the wayside.

Rather than leave innovation financing solely to private investment firms, Brazilian officials decided several years ago to step in and shepherd nascent companies. And in 2007, Brazil’s national development bank, BNDES, started Criatec I, a 10-year venture capital fund of 100 million reais, or about $48 million, aimed at start-ups. Foreign venture capital firms have been welcome to make follow-on investments. To date, not one has.

Instead, Brazil has doubled down on its goal of promoting technology growth. This week, the bank awarded a new fund of 186 million reais, or $89 million, to Icone Investments. BNDES is providing most of the capital, with contributions from regional public banks.

Though the government has been taking the lead, it has not been for a lack of interest from private venture capital. Over the last two years, Redpoint Ventures, Accel Partners and Sequoia have become active here, as have Peter Thiel, Dave McClure and European and Israeli investors. But BNDES believes a huge void remains in early-stage financing.

“They are voraciously investing in all the paste-and-copy stuff, the copycats. They are not really into technology innovation,” said Robert E. Binder, whose private firm, Antera Resource Management, comanages the initial Criatec fund with São Paulo-based Inseed Investments.

Innovation is an urgent matter in Brazil, economists say. According to the Research Institute for Industrial Development, this year through September, the country ran a $38.7 billion trade deficit in technology-intensive goods, an increase from last year. Brazil’s economy is highly vulnerable to global economic uncertainty, which is reflected in the country’s recent third-quarter growth figures.

A looming demographic shift is also a concern. In 2030, Brazil’s population is expected to decline and get increasingly older, potentially straining government resources.

Venture capital firms investing in Brazil’s start-up boom regard Criatec as well intentioned. Eric Acher, a founding partner at Monashees Capital, called it a “great learning experience to focus on innovation.”

Anderson Thees of Redpoint e.Ventures also praised the fund. “They are probably tapping into very good opportunities early,” he said.

Yet these and other venture funds have yet to team up with Criatec on investments.

For instance, Criatec looks for companies developing technology and with clear intellectual property that can be licensed or retained, Mr. Thees said. “Silicon Valley is less interested in this,” he said.

Mr. Acher agreed: “I don’t think at the moment Silicon Valley is looking for technology innovation in Brazil,” adding that the return did not yet justify the level of risk involved.

BNDES expected such risk aversion when it created Criatec.

“Not even Brazilian funds were showing interest in early-stage companies,” said Eduardo Rath Fingerl, one of the fund’s architects. “We knew it would have to be entirely a BNDES effort.”

BNDES, short for Banco Nacional do Desenvolvimento (the National Development Bank in English), has long played an important role in Brazil’s rise. Formed in 1952, the development bank initially financed major infrastructure. Its scope and size grew considerably under former President Luiz Inácio Lula da Silva, who thought Brazil needed brand-name multinationals to gain respect overseas.

In 2003, the bank disbursed $11.7 billion, but by 2010, that figure had skyrocketed to $96.3 billion. It has provided subsidized loans to most large Brazilian companies, including the oil giant Petrobras and the mining concern Vale. The bank has also supported foreign companies, including $3 billion to American Airlines to buy planes from Embraer, a Brazilian manufacturer.

Its dominance here has drawn criticism. Some contend the government bank has the wrong priorities, including financing mergers and acquisitions, which some contend should be left to the private sector.

“Long-term credit is still a problem in Brazil,” the Brazilian economist Mansueto Almeida said. However, “Brazil today is very different from what it was 20 years ago. It has very active capital markets.”

Criatec, however, is one of the bank’s smallest and least-controversial programs. Mr. Almeida said that with this initiative, “it is trying to do the right thing. That’s exactly what one expects from a development bank.”

Criatec I has had a slow track record of success. Usix Technologies, an insurance market exchange technology firm that received backing from Criatec, was acquired by the publicly traded Ebix in 2010. It has also backed companies with promise, like Amazon Dreams, which has developed patented techniques to produce açai and other berries with higher antioxidant content.

Some foreign investors are starting to look at the Criatec I portfolio. Intel Capital, the venture arm of the chip maker Intel, is evaluating the location intelligence software company Geofusion, according to a person briefed on the talks, who asked to be anonymous because the discussions were ongoing.

Kleiner Perkins Caufield & Byers showed interest this year in the agro-pesticide company Bug Agentes Biologicos but said the start-up first needed $10 million in revenue. Now that company is discussing a strategic partnership with Israel’s Bio-Bee Biological Systems. But such potential deals again indicate that foreign venture capital firms are still not courting the smaller start-ups.

“They all want to find these companies with $10 million to $15 million in revenue, but there just is not deal flow at that size,” said a person familiar with Kleiner Perkins’s outreach plans, who also asked to remain anonymous as the talks were private.

Based on 2012 estimates, only one Criatec I company of the 33 in business will cross $10 million in revenue.

Amazon Dreams’ revenue, for example, is still negligible despite the health craze in the United States for açai berries.

BNDES also established the fund to help out academics who have great ideas but don’t have the same success in obtaining the private sector financing that entrepreneurs do.

“Brazil has a lot of intelligence,” said Mr. Rath Fingerl, who retired from BNDES last year, but “the great difficulty is bridging the divide between the scientific and business communities.”

The fund also has limitations. For example, the bank holds veto power on most company decisions even though it is a minority shareholder. Yet, it appears quite flexible as it seeks co-investments.

BNDES’s political influence in Criatec companies “is totally negotiable,” said Marcio Spata, head of the Criatec fund at the development bank. “We are always open to changing our rights” for appropriate offers.

Eduardo Klingelhoefer de Sa, head of the department of funds at BNDES, said, “We would be very happy if private investors come so that our stakes are reduced.”

Aversionofthisarticleappearedinprinton12/06/2012,onpageB9oftheNewYorkeditionwiththeheadline:BrazilStepsUpInvestmentsinCrucial,butOverlooked,Technology