Start-ups in Brazil: Samba in the valley

The world is littered with would-be Silicon Valleys with catchy monikers, from Chilecon Valley (Santiago) to Silicon Wadi (Tel Aviv). Now Belo Horizonte, Brazil’s third-biggest city, wants to join the list. Dubbed “San Pedro Valley” in 2011 by a group of start-ups that formed a chance cluster in its São Pedro district, it is now home to nearly 50 young tech firms. (They switched the Portuguese “São” to the Spanish “San” for a cosmopolitan touch.)

Belo Horizonte, Brazil (photo: psdb.org.br)

The group now holds regular meetings and hack days, and two years ago set up a national association of start-ups. Gustavo Caetano, its president, acts as a mentor to many of San Pedro’s budding entrepreneurs—and an inspiration. His firm, Samba Tech, set up in Belo Horizonte in 2004, now has offices in São Paulo, Buenos Aires and Miami, and sells its online-video platform across Latin America.

That Belo Horizonte could pip bigger and richer São Paulo and Rio de Janeiro to the title of Brazil’s Silicon Valley may seem a stretch. But a big new middle class, fast-changing tastes and Brazilians’ voracious appetite for social media provide plenty of opportunities to challenge incumbents. Facebook overtook a local social-media site, Orkut, in Brazil in late 2011. It is now four times as popular. Only America has more tweeters than Brazil. A recent survey by Rakuten, a Japanese e-commerce firm, found that Brazilians are some of the world’s keenest “social shoppers”, swapping product tips with their friends and other online contacts.

By Brazilian standards Belo Horizonte boasts a well-educated workforce. Four of the universities ranked in the top ten nationally by the education ministry are in Minas Gerais, the state of which it is the capital. A lower cost of living helps—which is why Mr Caetano moved back from Rio to set up his firm. He stayed for a laid-back lifestyle he describes as “West Coast with added cowboy”. San Pedro firms that make it will need a sales team in São Paulo one day, he counsels, but their developers need not move.

Gustavo Caetano, CEO, Samba Tech (photo: Epoca Magazine)

Yuri Gitahy of Aceleradora, a “business accelerator” (ie, a firm which helps start-ups keep growing), prefers to work with entrepreneurs with experience in big companies, which usually means a spell in São Paulo. If San Pedro Valley takes off, he thinks, more of these will come home to found their firms. The state government plans to tempt them by offering up to 150 start-ups a year around 60,000 reais ($30,000) each, plus mentoring and shared working space.

The federal government is also trying to boost Brazil’s start-up culture. It has budgeted 45m reais to support up to 100 start-ups a year until 2015, chosen by nine business accelerators—most in São Paulo and Rio, one in Belo Horizonte. Up to a quarter may be foreign firms. To tap the money they must relocate and employ locals; their bosses will be fast-tracked for visas. Applicants with good ideas in fields where Brazil is already competitive (aeronautics, agribusiness, banking, oil and gas) or particularly needy (health, education, transport) are more likely to be picked.

All Brazilian businesses are burdened with complex and antiquated tax and labour laws. But start-ups suffer most. Although Minas Gerais has trimmed the time it takes to open a firm, only the federal government can make it easier to close one, a matter of at least as much importance for fast-moving tech entrepreneurs. Start-ups often want to reward staff with stock options; but the labour laws were not written with variable remuneration in mind. The taxman often struggles to understand start-ups that earn money by creating a market and then taking a small cut of its turnover; the result may be that tiny firms receive ludicrous tax demands.

To negotiate this minefield, start-ups are forced to spend heavily on specialist advice. Samba Tech has fewer than 100 employees—and a dozen lawyers and accountants. All this is a huge disincentive to setting up a business, for which the modest state handouts for start-ups barely begin to compensate.

Source: The Economist