Brazil Digital Report - Overview This document provides a perspective of Brazil's Digital Landscape
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Overview
Brazil Digital
Report
This document provides
a perspective of Brazil’s
Digital Landscape
This Report is proprietary of McKinsey & Company
McKinsey & Company 1
During the months of November 2019 and
February 2020, together with Brazil @
Silicon Valley, McKinsey built the second
edition of Brazil Digital Report – a broad
Today´s view of the Brazilian Macroeconomic
scenario, digital landscape, startup
Objectives ecosystem and the digital maturity of
incumbent companies
However, due to COVID-19, we decided
to postpone the publication
Today, we bring a summary of the findings
from the startup ecosystem in Brazil pre-
Covid-19
Dominant
Incumbents
3
xx Growth in market cap
Top 10 companies market cap¹ While the top
USD B
companies in
the US and
7,049
China became
~4X
more valuable…
~2X
2,597
1,855
1,432
2010 2019 2010 2019
USA China
4
Top 10 companies market cap¹ Other companies Technology companies XX % of total GDP
USD Bi
2010 2019 2010 2019
369 1.305 303 569
296 1.203 233 458
239 923 222 295
198 916 140 234
195 585 135 218
192 554 102 213
190 437 98 183
184 405 76 147
182 384 73 146 And more high-
180 337 51 135
tech over the
15% 33% 24% 18% years…
Source: Capital IQ McKinsey & Company 5
1 Considers market cap in Dec 31st of each year
Brazil’s top Top 10 companies market cap¹
USD B
xx Growth in market cap
companies
experienced 884
considerable value
loss before recent 0.3x 592
recovery…
2.5x
+144,6%
242
2010 2015 2019
1. Considers market cap on Dec 31st of each year
Source: Capital IQ McKinsey & Company 6
The weight of legacy
…and remained mostly traditional players
Other companies Technology companies X % Market cap / Country GDP
Top 10 companies market cap¹
USD B
2010 2019
228 101
165 84
96 73
87 70
66 68
54 46
52 37
39 29
37
38% 24
33%
23 23
1 Considers market cap on Dec 31st of each year
Source: Capital IQ McKinsey & Company 7
The new tech era
Tech companies greatly outperformed companies from other sectors…
xx Growth in market cap/value
Top 10 non-technology Top 10 technology
companies market cap¹ companies value1
USD B USD B
884
0.7x
555
3.2x
86
27
2010 2019 2010 2019
1. Considers market cap for listed companies and latest valuation for non-listed companies
Source: Capital IQ McKinsey & Company 9
The weight of legacy
… while their profile changed: most top 10 technology companies in 2019 are
digital attackers
Top 10 technology companies market cap Other companies Technology companies X % Market cap / Country GDP
USD B
2010 2019
11.0 21.3
8.5 11.3
3.2 10.8
1.1 10.6 Only 2 of the
biggest tech
1.0 10.0
companies
0.6 8.1
were in top 10
0.5 5.7 in 2010
0.3 3.1
0.3 2.5
0.2
1% 1.6
5%
1 Considers market cap on Dec 31st of each year
Source: Capital IQ McKinsey & Company 10For Brazil to
evolve on the new
tech area…
… Brazilian start-
ups need to thrive
11To understand
Brazil’s
technological
start-up Quantitative survey Qualitative interviews
environment,
we surveyed 400+ ~50
Leaders occupying various
400+ start-ups Brazilian start-ups
across different positions in the market:
Start-up founders, top
and interviewed industries,
regions, and executives, Venture Capital
investors, Institutional
~40 leaders development
stages leaders, regulatory experts
between Nov/19
and Feb/20
Source: Brazilian Start-ups Landscape Survey – McKinsey 2020 McKinsey & Company 12Region 56%
are in the South East region
The
surveyed
start-up Team Size
66%
landscape have less than 21 members
presents a
diversity of Age 55%
ventures are less than 4 years old
Source: Brazilian Start-ups Landscape Survey – McKinsey 2020In Brazil, start-ups are typically founded by individuals
with business-education background profiles
Average age when Founders academic Share of women
they started company formation founders
Entrepreneur
Landscape
31,3 38% 40% 22% 57%
Top 100
Start-up
30,3 54% 46% 2%
Unicorns 32,2 53% 47%
3%
No degree
Business / Social Science
Science / Engineering
Source: Brazilian Startups Landscape Survey – McKinsey 2020; Distrito 100 Super FoundersChances of success are significantly higher for serial entrepreneurs
26% Unicorn founders,
the share of serial
Top 100 founders entrepreneurs rises to
had a previous start-up
experience before
launching their
business
44%
Source: Distrito 100 Super Founders, McKinsey analysis McKinsey & Company 15Investment and Growth
Most startups
are
funded with
own,
friends & family
money 54%
of Brazilian start-
ups begin their
businesses with the
founders, family
and friends funding
Source: Brazilian Startups Landscape Survey – McKinsey 2020 McKinsey & Company 17Angel investment is
Brazil / USA
Angel investment
USD M
xx investment gap
growing but still
little
developed
44 447x
2010 27
1.612
112 86x
2019 271
9.656
Source: Pitchbook McKinsey & Company 18There has been a major
increase in venture-
capital investment over
the last 5 years
Average yearly VC investment
USD B
0.06 0.6 1.5 2.4
(0.00% of GDP) (0.02% of GDP) (0.07% of GDP) (0.12% of GDP)
Before 2012 2012-2017 2018 2019
Low presence of foreign VC Sporadic foreign VC investments iFood raises USD 400M in Led by Softbank, with a USD 5B
capital, the largest funding fund for Latin America, foreign
27 Brazilian VCs¹ launched Gradual development of VCs
round for a tech start-up in Latin VCs increase their investments
until this date totaling 75 local VCs
America to date in Brazil
Increasing interest in tech
companies 81 local VCs 82 local VCs
1. Considers tech-related VCs
Source: Distrito; Pitchbook McKinsey & Company 19Investment and Growth > 1. Funding is no longer a bottleneck
However, as a % of GDP, VC in Brazil still lags
behind mature nations
Total Venture Capital activity - 2019 Total Venture Capital amount
Total Venture Capital/GDP USD Bi, 2019
Israel 0,99% 3.9
USA 0,60% 128.3
China 0,33% 46.4
Brazil 0,12% 2.4
Source: Pitchbook McKinsey & Company 20In 2019, FinTech's have attracted ~40% of VC investment volume
Investment (USD M) Deals (#)
935
62
355 31
344
279 24
18
210 209
12 10
8 17
43
7
Fintech Real Estate HRTech Mobility RetailTech AdTech HealtTech AgTech
Source: Distrito Dataminer McKinsey & Company 21Higher valuations
created the
imperative to go
big or go home…
# of months to reach 1
35%
Had as the main objective
Launch 1
2014
million clients
40
expand locally
2015 34
19%
Had as the main objective
2016 38
expand internationally
2016 24
2017 23
2019
6
1. Considers date of availability of first digital product (account or credit card)
Source: Brazilian Start-ups Landscape Survey – McKinsey 2020; McKinsey analysis, Press search, Company websites McKinsey & Company 22‘
With higher burn rates,
there’s no more room
for zombie start-ups
‘
Faster burn just trying to survive.
rates, faster Average time to become a unicorn since VC Founder
unicorns year of foundation
Number of years to reach a USD 1B valuation or more
and faster 12,0
3,7 years global
failures average in 2018,
considering the
fastest quartile
8,0
7,5
6,4
5,5
0,8
2006 10 11 12 13 2018
Source: Press clippings, company websites McKinsey & Company 23Brazil has consolidated itself as a continental hub,
attracting players from all over the world...
2/3
of gross revenue
North America
Europe
#1
Fastest growing market
for Prime users South America
Asia
Source: McKinsey, press search McKinsey & Company 24… and a top unicorn builder
13 Unicorns1
In Dec/2019
13 200+ 24 12
100
8 +
23
This Report is proprietary of McKinsey & Company
1. Considers disclosed private investments over USD 1B, recent IPOs by companies with a market cap over USD 1B, and non-disclosed investments with a market perspective over USD 1B
2 CB Insights criteria
Source: CBinsights Unicorn Ranking, Crunchbase, 2019; Team analysis McKinsey & Company 252019 M&A activity in start-ups In 2019, there
Company Segment Acquirer were big
structural exit
Business Software
opportunities
Personal Products
through
Consulting Services (B2B)
Consumer Finance
M&As…
Mobility
Entertainment Software
Business Software
Media and Information Services
E-commerce
Retail
Source: Pitchbook McKinsey & Company 26… and IPOs Main tech IPOs per year
Number of IPOs
Brazilian Stock Exchange
American Stock Exchanges
4
1
2018 2019
Source: Pitchbook McKinsey & Company 27Local
champions
favored US Volume of equities traded
stock Higher demand and volume USD B, 2019, annual
15.910
exchanges 12.248
More savvy and
specialized investors
1.066
5x cheaper trading
and clearing costs
# of listed
companies 328 2,143 3,140
Greater control over
company voting rights
Source: World Federation of Exchanges, McKinsey Analysis McKinsey & Company 28COVID-19, however, already impacted
funding rounds…
“For those during fundraising process, how was
your fundraising impacted by COVID-19?”
30% Of startups canceled their Fundraising process
due to COVID-19
16% Of startups had informal
agreements
that were canceled or are in re-negotiation
11% Of startups decided to focus on insiders
investors instead
20%
Of startups maintained their Fundraising
process unchanged during COVID-19
13%
Of startups were able to close their
Fundraising round during COVID-19 (2% after
renegotiation)
Source: Atlantico Survey April/2020“What is your expectation on the funding
scenario after COVID-19?”
… And should impact Valuation adjustments
according to FX
0-25% reduction
on valuations
25-50%
reduction on
>6-month
freeze in
future valuations… exchange depreciation valuations funding activity
13%
24% 22% 27%
Source: Atlantico Survey April/2020
Source: Atlantico Survey April/2020Talent
and
retention
McKinsey & Company 31xx Salary Gap Top 12 Corporate Top 12 Start-ups
Salary gap tends to decrease with more-senior roles
Average monthly Salary1
BRL thousands, 2019
20.5 20.5
Start-ups
11.7
10.7
compete for
4.9
8.8
7.0 top talents
2.2 2.8
1.6
Intern Analyst Middle manager Manager Director
38% 75% 26% 9% 3%
1. 8,373 salaries, 12 start-ups and 12 incumbent corporations – does not include equity
Source: Brazilian Start-ups Landscape Survey – McKinsey 2020, Love Mondays McKinsey & Company 32However, tech talent seems to be a bottle neck
Expected demand for tech professionals
Thousands, 2020-2030
2.340
1.270 >1 mn
Cumulated talent gap for
1.070 tech professionals by 2030
Data Scientists / Engineers,
UX designers, Mobile and Web
Developers and Agile Coaches
are among the most wanted
profiles
Accumulated Accumulated Accumulated
demand, 2020-2030 supply, 2020- Talent gap
2030
Source: McKinsey analysis based on Brasscom 2019 report McKinsey & Company 33Graduates by field of study
Technology talent- Technology-related courses Business Administration and Law
gap remains 33
significantly bigger
in Brazil: for each 23 23
new tech 11x
19
18
professional, Brazil 5x
5x
3x
3x
graduates more 5
7 7
3 4
than 11 law or
business students Brazil US Germany Estonia India
Source: Unesco UIS statistics, 2018-2017 depending on last country report McKinsey & Company 34There is a huge quality gap in tech education
‘ Tech education in Brazil is
oriented to academia, and
there is a gap between what
‘ 35%
of tech courses are
students learn and what the
below minimum level¹
market needs.
to satisfy market
Start-up CEO expectations
1. Considers in-person college education courses (Ensino Superior) in 2018
Are considered on track courses rated 3, 4 or 5 by CAPES institute
Source: Brasscom, MEC, SEMESP McKinsey & Company 35Globally, governments have been promoting education initiatives to address
the gap in technical education
Type of initiatives Global example
Increase of technology spots at In 2019, China opened around 400 majors
traditional universities related to big data, artificial intelligence (AI)
and robotics in universities
Revamp university curricula to Traditionnal universities have been
address market needs adapting the programs
Develop online learning to increase In 2020, India’s government authorized its top
access to technical education 100 institutions to offer fully online degrees to
support its ambition to double graduates by 2035
Investment in alternative The Israel Innovation Authority funds extra-
technical-education initiatives academic coding bootcamp since 2018
Offer incentives for tech Beijing government is easing visa policies and
professionals immigration offering cash incentives to attract top class
global talent
Source: McKinsey analysis McKinsey & Company 36
Source: McKinsey analysis; Interviews, press clippingsStart-ups develop their own alternatives to fill the talent pipeline
Going where Rising own Strengthening ties
talents are talents with academia
Acquiring Offering non
Importing companies financial incentives
talents for talents
Source: McKinsey analysis; Interviews McKinsey & Company 37The “young entrepreneur” is a myth
USA example
All start-ups Highest growth start-ups
Age of start-up founders
%
16
42 45
29 and younger is the average age
10
is the average age
of entrepreneurs at of founders
29 the time they founded starting the top
30-39 their companies 0.1% of start-ups
27
30
40-49
35
20
50-59
22
6
60 and older
6
Source: Age and high-growth entrepreneurship; MIT, Northwestern and U.S. Census Bureau McKinsey & Company 38As they grow,
start-ups
‘
Fast growth comes with talent challenges:
the young professionals that were great on
thrive on starting the business not necessarily are
good on leading a big organization. When
‘
“white hair”
growth comes, startups need experience
professionals to lead big operational
teams and standardize processes.
experience CEO of Startup
McKinsey & Company 39The pressure for lower burning rates
due to the COVID-19 crisis should impact
talent acquisition…
“Which of these actions did you already
implement (post COVID-19 crisis) or will
implement?”
55%
26% 29%
22% 20%
12%
6%
Freezing Freezing Bridge Deferred Vacation Reduced Reduced
some all hiring funding tax work salary
for
types of payments schedule
>50%
hiring FTEs
Source: Atlantico Survey April/2020
McKinsey & Company 40… but massive layoffs are yet a question mark
Predictable layoff due to COVID-19
68%
14%
10%
5%
1%
0% 0-10% 10-20% 20-50% >50%
Source: Atlantico Survey April/2020
McKinsey & Company 41In summary:
On funding: we were happy and On talent: the challenges of BC are still
we knew it! here, but now is time to bootstrap and
hang in there.
We reached an all times high in
terms of money inflow for Startups are competing for top talents
innovation, with higher
valuations and faster growth Tech skills are a bottle neck and
companies need to be creative to attract
COVID-19 should cool down and retain; the country should have a
momentum, but maintaining broad plan to close the gap
higher landing
The young entrepreneur is a myth, and
Bridge funding or new rounds on with growth, comes the need for
lower valuation will likely emerge experienced professionals
COVID-19 should put pressure on new
hiring and massive layoffs are yet a
question markObrigado, stay safe!
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