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Summary:

Compared to Mexico, the web and mobile startup ecosystem in Brazil is hot — probably too hot. Here’s 10 things you should know if you want to build, buy, invest in or work at a tech startup in Brazil.

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Sao Paulo, BrazilCompared to Mexico, the web and mobile startup ecosystem in Brazil is hot — probably too hot.

There seem to be almost as many foreign entrepreneurs and investors — Americans, Germans, Spanish — looking for opportunities to make money in Brazil as there are Brazilians building companies and investing.

Brazil’s booming economy and its population’s interest in new web and mobile services (hello, e-commerce) make it a market that’s already exploding.

But the challenges are many — the taxes are ridiculously high, the traffic is non-stop and crime is rampant in Brazil’s big cities like Sao Paulo and Rio. I’ve experienced these all first-hand as I’ve been traveling with the Geeks on a Plane group through Latin America this week.

Here are 10 things you should know if you want to build, buy, invest in or work at a tech startup in Brazil…

1). Whoa, taxes!: It’s one thing to complain about Brazil’s high taxes, but it’s another to crunch the numbers and see the real differences. Brazilian entrepreneurs told our group that it’s not uncommon to pay about 100 percent to 120 percent in taxes on things like employee salaries, company revenues and goods and services. So, for example, a startup hiring a new top notch engineer or exec could typically pay in the $300,000 range including taxes. The same types of taxes go for buying gadgets and goods — the iPhone costs around $1,000 here. If you want to do business in Brazil, this is just the reality, so get ready to spend.

Entrepreneurs in the region are worried that the economy will stop growing so fast if the government doesn’t become more business friendly. For example, all employees have to be members of unions.

2). e-Commerce is booming: E-commerce in Brazil is like if one morning everyone woke up with a broadband line, a new credit card, disposable income and a desire to spend, according to local entrepreneurs. And there is also tons of room for growth. Out of the 200 million population, 34 percent of Brazilians have internet access. And there are projected to be 15.4 million smart phones sold in 2012. Some of the top (and growing) e-commerce sites in Brazil include Peixeurbano, Netshoes.com.brNova Pontocom, and B2W. Investor Niklas Zennstrom, who founded Skype and Kazaa, told me that e-commerce is what’s working for web startups in Brazil.

3). Here come the clones: Like most new international markets that are rising after the initial internet boom in the U.S., a lot of sites are looking to copy the e-commerce models of the U.S.. Entrepreneurs regularly exclaim their companies as “the Groupon of Brazil,” “the Zappos of Brazil” or the “Amazon of Brazil.” Foreign entrepreneurs are moving to Brazil to start these types of companies, too. It’s a natural way to create the web here — look for what has worked before. Others, like Zennstrom, are hoping that, some day soon, there will be more original and uniquely Brazilian e-commerce ideas.

4). Close to a bubble: Entrepreneurs building web businesses in Brazil say that the Brazilian tech startup market is “dangerously close to being a bubble”, because of the large influx of entrepreneurs and capital going into the market.

5). Infrastructure problems: Brazil’s economy and population are growing so fast, particularly in cities, that there is a real problem with infrastructure. The Geeks on a Plane group spent hours in traffic commuting to get to meetings with startups and investors. Entrepreneurs told us that their employees regularly start working much later hours because the traffic is so bad.

6). It’s cool to be Brazilian: Adding to the potential of a bubble, there is the cool factor of setting up and building a tech startup in Brazil. Back in 2006 and 2007, entrepreneurs say, Brazil was just another South American country. But now Brazilian companies are starting to be seen as hip, cool and novel. That will only grow, with the Olympics and the World Cup both set in Brazil in the coming years.

7). Equity uncommon: It’s not that common in Brazil to offer new members of tech companies equity in their companies. Entrepreneurs say, legally, it’s very complicated to set up the equity structure, and Brazilians also aren’t asking their companies for shares when they join — they prefer cash up front to shares. But the downside of that is that when there’s some blockbuster exit, like a Facebook IPO or when eBay bought PayPal, there won’t be a new wave of angel investors created, like there were for PayPal.

8). Economic changes in Brazil: While well-off consumers make up a large portion of the e-commerce boom in Brazil, the economics of Brazil are actually changing and the middle to lower class of consumers is quickly rising. Seven years ago, people that earned up to $1,000 a year made up a large percentage of the population but not of the consumer population with a disposable income. But that’s changing and increasingly this group of consumers is becoming much larger. The future of e-commerce and mobile startups will lie with this population.

9). Basic phones to smart phones: Mobile-focused entrepreneurs say that the growing power of the smart phone in Brazil is an important trend. While only 14 percent of cell phones in Brazil are currently smart, smart phone penetration is growing rapidly and smart phone owners are actually buying a lot of things on their phones.

10). Foreigners in Brazil: Many of the startups in Brazil are being created, and invested in, by non-Brazilians. At this point, the Brazilians don’t necessarily seem to mind, according to many of the entrepreneurs. Companies run by Americans or the Dutch are seen as interesting, not as a threat to the local Brazilian population. The trend just continues the multi-cultural aspect of Brazil’s cities like Sao Paulo. Down the road, I could see that changing.

Image courtesy of JorgeBrazil.

  1. Having done business in Brazil for the last decade, I would add the significant challenges associated with corruption and graft. The employment courts take employee “rights” to an extreme such that it is virtually cost prohibitive to fire any employee for anything. The black market is insane, check out what it would take to legally get a Macbook or an iPhone into Brazil. Therefore, they are all smuggled in. Brazil has some tremendous potential, but the challenges are even larger than one could expect. As the Brazilians say “Brazil is the country of the future…and it always will be.”

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    1. Mark, one can learn to deal with labor problems, it is not that big if you start to think as a brazilian biz man; black market is gradually fading, things are improoving. The Future has arrived, dont fight with facts, and all you have to understand is to operate as we dance. It is possible, it is fun, profitable and will open minds for new possibilities: just dont get stucked in another order.

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    2. Gabriel Tosi Thursday, May 24, 2012

      Hi, i’m brazilian. And you’re wrong. I’ve iPhone, I’ll buy a mac, and news, it’s all legal. So don’t say things you don’t know about Brazil. We’ve our problems just like you guys have no matter what place do you live.

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  2. Your information regarding taxes is incorrect. While Brazil does have a high tax rate, it is certainly not 100-120%.
    I’ve been in Brazil over a dozen times in the last year and have never experienced a problem with crime. Although there are certain areas that are dangerous, I’ve never experienced any crime in Sao Paulo. Brazil is definitely an overheated economy and has a number of problems, but your data should be accurate first and your observations regarding rampant crime should be backed up.
    Thank you.

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    1. The article is correct when saying taxes are over 100% when concerning labor costs. To be precise, for every 1 dollar in salary, a company pays 1.08 to the government.
      And although crime has diminished in SP, it has risen dramatically in other areas, such as the Northeast. Not to mention the explosion of government crime and bribery since 2002.

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      1. wrong info , for every $ 100 in salary you pay the Government FICA for about 24% , now By law you pay Brazilian 13 salaries , 30 days paid vacation plus 30% bonus * FGTS similar to US unemployment compensation , all this money belongs to employee

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    2. Never experienced crime in Brazil? Have you ever been out at night? Very few cities (i.e. Curitiba) as safe unless you are with a crowd.

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    3. Katie Fehrenbacher Thursday, May 17, 2012

      @Alex That was according to about a dozen CEOs of brazilian tech startups who all said the same thing about hiring. Have you hired workers in Brazil and experienced something different?

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      1. Hiring has always been a problem in Brazil but I’m checking on the exact amount on the tax burden that we have in Sao Paulo and I will publish the number as soon as I have it.
        Regarding security, I lived for over 20 years in Mexico City and had a total of 2 incidents there. While living in Canada for over 16 years 2 more incidents, all of them minor. In all my 18 trips to Brazil, no incidents, but given, I’ve never lived there full time. I do go out at night and travel either by car, taxi, walking or metro in Sao Paulo. It’s a matter of trying to always be aware of your surroundings. Brazil has had its share of violence, but in my experience is not rampant.

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    4. Finally got some sort of answers. Taxes go from 50 to 100 % but nobody can give me final numbers, as they all include taxes and benefits and really depends on the income. Rules are very complicated. And remember in Brazil people work 12 months (not really) but get paid for 13. The 13th month is calculated in the taxes but the 100% is really the employers burden, not necessarily taxes. It is very strange indeed as most people don’t even know how much they pay in sales taxes as they have included in the prices. Brazil does face a lot of challenges and their fiscal structure just adds to that.

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  3. I’ve been to Brazil in the past, 3 times in fact, but I’e never experienced any crime while I’ve been over there but I was in Sao Paulo during all of those visits!

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  4. Fernando Trindade Thursday, May 17, 2012

    Hello I live in Brazil and I read this site daily. Indeed, Brazil has many social problems such as violence and corruption but it is not so scary. The country is too big and not all places have a lot of violence. I agree that we need to improve much, but our country is growing and is a good place to invest in startups.

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  5. One very important point missing: Brazilians exagerate about everything, and they BS people almost constantly. Sounds like that happened to you Katie!
    I am brazilian and after 8 years in europe I’ve returned to open a sub of a french business in rio. It’s not 100% tax, it’s just under 70%. It’s high enough, no need to exagerate, galera! The real problem is lack of talent, not the cost of it, be real.
    Bureaucracy is the main bottleneck, but it’s improving. Lawyers however are making way too much money in the meantime…
    Like carnaval, the brazilian tech scene has lots of noise, most people are in disguise, everyone is excited and seducing everyone else, and after wednesday of ashes most people will vanish.
    Crime has gone down significantly, but it’s still a problem. That said, the outlook is very promising on that front (paris feels more dangerous than rio these days).

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    1. Thank you for sanity. totally agree.

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  6. “large influx of entrepreneurs and capital going into the market” could only be a threat here if there was dismatch between the entrepreneurs and the local reality market. but that only happens to foreigners. brazilians have been building national businesses empires besides any “unwelcoming factors”. you guys really wanted it that easy? we’ve been historically exploited by “developed” countries – and by our own notion of what’s power and what’s best.

    covering the startup movement in Brazil for some years on the ground, most topics I read in this post seem so alien. and such diversity of view points is creative.

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    1. Agreed some topics feel alien, sounds like they met a non-representative crowd of Brazilian entrepreneurs (or they BSed them).
      Yes we might have been historically exploited by developed country but it’s because we’re getting the attention and investment from those countries today that our tech scene is evolving so fast, so we should be more welcoming! No man is an island – collaboration is the key for growth, and that’s not yet built into Brazilian entrepreneurs’ DNA.

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  7. Id like to congratulate GIGAom’s team for this article about the brazilian startup scene. Im a huge admirer of your site, habitual reader and felt really happy to read your introduction to our peculiarities to the american tech audience. Im looking forward to the first gigaom seminar here in Sao Paulo for it will most definetly be a huge sucess! As you may allready know, theres a lot of opportunities and cash to be made here, despite the high taxes. I, count on americans, to ounce again, lead the way towards economic development world_wide.

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  8. meiradarocha Saturday, May 19, 2012

    Brazilian entrepreneurs lies to you. Brazilian taxes are around 34% of GDI.

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  9. André Felipe Wednesday, May 23, 2012

    The main problem about brazillian taxes is that – based on the comments thread – nobody knows anything about brazillian taxes.

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      1. Katie, I’m Brazilian and I have lived in SP and Europe for a long time I must say ur article is dead on. Congrats!
        For the people saying crime is not an issue, while in EU an incident classifies as people taking your things when ur not looking, in BR an incident means a guy with a gun to ur head asking for the thing. There’s a world of difference there. Also just ask someone living in SP for more than a couple of years and all will tell u they’ve been in that situation at least once.
        BTW the taxes thing. Just double it for imports and employes. That math is simple and accurate enough. What the other comments are saying is like saying the dollar is not 2 reals but 1,98. Common guys.

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  10. Great Katie, nothing new but a great summary of the things here. Shall use it (with the due credit) to inform prospects from abroad that contact us for our PR and Press Relation services (www.artpresse.com.br).

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