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Startups like Flixbus are drawn to Brazil.
Photo: Lukas Görlach/ dpa
Brazil has seen exponential growth in startups over the past few years.
In the last five years, the number in the country has tripled to around 15,000.
The number of donors is also increasing.
Despite the pandemic, investments tripled by 2021, especially in venture capital investments, the country is a leader in Latin America.
Therefore, foreign startups are also expanding their activities to Brazil.
These recently included the German bus company Flixbus and the neobank N26.
In view of the growth in investments in venture capital to around eight billion dollars and the new legal framework for start-ups, Bruno Vath Zarpellon, head of the innovation and sustainability department at the German-Brazilian Chamber of Commerce and Industry (AHK), assumes that there will also be other German startups will move to Brazil.
"Foreign startups can expect to find in Brazil a large consumer market that is open to innovation and, moreover, offers tools to support the internationalization and growth of their companies," says Zarpellon.
There were ten new unicorns in Brazil in 2021
Since 2017, the Chamber in São Paulo and the German Center for Research and Innovation São Paulo (DWIH) have been supporting German startups with their first steps on the Brazilian market.
To do this, they have created a program whose goal is to bring together startups and large AHK member companies such as BASF, Bayer, Siemens and Voith in the country.
"German startups can present their solution to a Brazilian problem and, if they are convincing, continue to exchange ideas with the companies," says Zarpellon.
São Paulo is not just any city, it is the largest German industrial city outside of Germany.
More than 800 of the 1,400 German companies in Brazil have settled in the metropolitan area.
Many German economic giants have their Latin American headquarters here.
With ten new unicorns in 2021, i.e. companies that achieved a valuation of more than one billion euros, and an estimated seven more startups that will reach this level in 2022, Brazil ranks eighth with the most unicorns in the world.
There are currently more than 20 unicorns in the country.
"In addition, local consumers are more open to innovative services and new technologies," says Zarpellon.
This also favors increasing access to investments.
Recently, the government in Brazil also introduced a reduction in bureaucracy and some simplified guidelines for investors, tax cuts and support mechanisms.
"In this sense, sub-national entities should help strengthen economic cooperation between Germany and Brazil,"
So it's no wonder that N26, named unicorn in 2019, is also moving to the country.
Since the first fintech started in Brazil in 2013, the market has grown rapidly.
In the last six years, the number has increased by 147 percent to over 1100 fintechs.
This makes Brazil currently the largest fintech ecosystem in Latin America and the city of São Paulo the fourth largest fintech ecosystem in the world.
The sector achieved $517 million in investments in the first half of 2021 alone.
Other fintechs are already successful in Brazil
In Brazil, alongside N26, there is already a big top dog among the neobanks: the Nubank.
With more than 40 million customers in Brazil alone, it is one of the most successful fintechs.
Other providers such as Inter and C6 Bank have already positioned themselves on the market.
Zarpellon from the AHK is still in a positive mood.
"I believe that despite its national competitors, N26 will find many potential customers since most young Brazilians are inclined to use fintech services, electronic payments and new communication methods such as credit cards or PIX transfers," he says.
Traditional banks would have to hurry even more to invest in digital transformation in order to improve and develop their digital services.
"The proliferation of digital banks is also democratizing banking services for Brazil's less populated regions. The arrival of N26 is an opportunity for the growth and improvement of national fintechs, motivated by a strong competitor," Zarpellon said.
But Zarpellon also sees risks, for example in dealing with data security.
"This risk is even greater with fintechs because of the visibility and specificity of the data," he says.
"In my opinion, the focus should be on developing efficient solutions against fraud and promoting transparency."
Also, authentication methods and working with regulators would need to be critical tools to mitigate risk and ensure the security of current and future customers.
Market entry of N26 could be more difficult than expected
N26 has been preparing to enter the Brazilian market for around three years.
The decision to go to the market is based on the one hand on local conditions and on the other hand on the demand that consumers have in this market.
"This is where we can start with our different N26 account models and offer consumers digital solutions that meet their needs," explains a spokesman for N26.
But entering the Brazilian market could be more difficult than described.
Recently, there has been public criticism of the startup from Berlin.
Last year, the Bafin forced the company to limit its growth in new customers at home to 50,000 per month due to serious internal problems.
The company has also struggled with losses abroad.
By withdrawing from the UK and the US market, the company sunk millions of euros on marketing alone.
"Our withdrawal from the US was a strategic decision," says N26.
In the future, the company wants to focus more on European business and bundle product development and innovation more closely.
Unexpected Attack
The new attack on the Nubank was therefore unexpected. N26 justifies it with an enduring global vision, despite the current focus on the European market. There were also problems on the new promising market in Brazil. The fintech was already looking for a banking partner in the country in 2019 - without success. Now the company wants to apply for its own local banking license to make the product more independent. "For the Brazilian market launch, we took a different approach than in the US, acquired our own fintech license for Brazil and decided against a partner bank," the company said.
The German startup does not seem to shy away from Nubank.
"Different banks can coexist and serve different customer types and needs. This also applies to the Brazilian market, which currently offers little choice and little customer orientation," said a spokesman for N26.
Since acquiring the local fintech license in Brazil, the team of around 60 people in São Paulo has focused on the corresponding product development, which is currently in the beta test phase.
Interested consumers can register on a waiting list from which participants are selected for the beta program.
Around 200,000 customers have currently signed up for the pre-launch of N26 in Brazil.
“These are signs of openness in the market. Considering all the benefits in terms of interest rates and the highlighted low interest rates, the sector is expected to accelerate disruptive change in the way people bank, transact and invest will," says Zarpellon.
Experts see room for more fintechs
Fernando Fritz, operational director of InvestSP, an investment promotion agency from the state of São Paulo in Brazil and a member of the Economic and Scientific Center Brazil-Germany, agrees.
The agency acts as an interface between private companies and public institutions.
The main objective is to support the private sector.
"There is already a strong understanding in the Brazilian ecosystem that access to venture capital, required to invest in new businesses, is worthwhile capital. Technology combined with rapid development focused on a specific problem of the market or consumer makes an impact in quick results for the companies.
"The size of the market we have in Brazil, coupled with the challenge of unbanking and financial literacy, means there's still room for other fintechs," says Fritz.
Especially in the mid-west, north and north-east of the country there are still many cities without access to banking agencies.
In addition, more than 40 percent of Brazilian cities have no bank branches, while the country has more than one smartphone per capita.
"The ecosystem here is not yet saturated," says Fritz.
He therefore believes that N26 will explore the Brazilian market well.
"On the other hand, it's also an opportunity to help solve Brazil's structural problems in the industry," he says.
"The Brazilian start-up ecosystem is in an interesting phase of maturity and has a relevant market size," says Fritz.
In particular, companies in the areas of health, financial services, mobility and transport, construction and housing, education and sustainable agriculture are currently being drawn to the market.
The mobility market is one of the five sectors with the most investments in startups in Brazil in 2021.
The reason: Most of the transport in Brazil is still road transport, there is a lack of rail alternatives for long-distance passenger transport.
Fritz therefore also sees good opportunities for the long-distance bus company Flixbus in Brazil.
Like N26, the company expects other relevant competitors such as Buser and 4Bus to enter the market.
However, Flixbus seems ready for the competition.
"More suppliers on the market will increase competition, which will result in a better overall offer for customers," says a spokesman for the company.
"The market in Brazil is currently very fragmented, there are many suppliers, but each of them is only active in a specific part of the country and has little competition."
However, there will be hurdles for both N26 and Flixbus.
After all, many startups in Brazil also have to give up after just a few months.
"Ignorance of legislation and bureaucracy, lack of experience with the management and governance processes, difficulties in carrying out tests and the necessary validations," lists Fritz as reasons.
In addition, entrepreneurs often underestimate cultural differences.
Many young companies would not gain the trust of potential customers by ignoring the dynamics and customs of the local business environment.
"For example, compared to Germans, Brazilians are more flexible and open to new applications, are heavy users of social networks and care less about data protection," says Fritz.
In the future, Fritz expects an open market that will attract more startups to the country due to the new regulatory framework.