The innovation ecosystem in South America’s largest city is evolving fast. Opportunities in São Paulo abound for investors who can navigate the complexities of the megalopolis and use them to create or develop highly scalable offerings.
With a population of nearly 15 million people, half of Brazil’s billionaires and accounting for 18 percent of the country’s GDP, São Paulo is often referred to as the country’s innovation powerhouse. The city concentrates over 60 percent of startup investments in Brazil and well over 2,000 ventures working on tech-based products and services.
“When you think about tapping into the Latin American innovation ecosystem, São Paulo comes first on the list. The largest chunk of invested capital in Brazil is in São Paulo and that is also true when compared to other large capitals in the region,” says Michel Porcino, manager at São Paulo investment agency SP Negócios.
São Paulo is a decision-making hub, the Latam base of 65 percent of Fortune 500 companies and tech giants like Spotify, Airbnb, Google, Netflix and Amazon. It is also home to many local unicorns, including ridesharing firm 99, fintech Nubank and real estate startup Quinto Andar.
A straightforward choice
The Brazilian megalopolis has huge urban problems and therefore offers opportunities that are equally vast, according to Porcino. “Possibilities in São Paulo are directly related to the many problems the city has, notably around areas like mobility and healthcare.”
Porcino cites São Paulo-headquartered low-cost health clinic network Dr Consulta as an example. “Offering a solution that makes it easier to get to the doctor is a clear illustration of a business that caters for the complexities of a large urban center, where it can be hard to get to places.”
“If you want to grow significantly as a company, it is not useful to build a solution in a small town that cannot be applied in a large urban center. If you create, say, a mobility solution in São Paulo, it can be easily replicated in another city,” Porcino adds.
According to Porcino, setting up shop in São Paulo if a no-brainer for companies wanting to scale in the country as well as the region: “If you are setting up shop in a small town in Brazil, you will face challenges if you are not a B2C business – and even for those businesses it makes sense to come to São Paulo, because we have millions of potential customers who are early adopters of technology,” he notes.
“Other Brazilian capitals might be more conservative and less open to experimenting with disruptive solution that hasn’t seen the light of day in some cities in the south of Brazil, for example. But in São Paulo, there is an openness that is unique,” Porcino adds, citing mobility companies Yellow and Grin, who achieved exponential growth in the city within a few months.
“It is not easy to start a business like Uber in Cuiabá, for example. But if you start it in São Paulo, prove your business works and make it known, it has a much higher chance of succeeding elsewhere,” he points out, pointing out that the city is a trend-setter when it comes to innovative ideas.
“That doesn’t mean good ideas cannot start elsewhere. Companies from all corners of Brazil often use the density they can find in São Paulo to grow and scale, then keep part of their operations in their native cities while part of the business stays here.”
Over the last five years, Porcino has witnessed an evolution in the innovation ecosystem in São Paulo, evidence being the proliferation of accelerators. According to the SP Negócios head, there were only a handful back in 2014, today the city boasts over 50 such programs, the majority backed by large companies.
Large organizations headquartered in São Paulo are very aware of the need to innovate and this is a subject that is top of mind for the C-level community across all sectors. Porcino is often in touch with traditional firms such as São Paulo water management company Sabesp, who is readying its own initiative to get closer to local startups. According to the SP Negócios head, there are hundreds of local companies like Sabesp that are hungry for innovation.
“About 90 percent of the main accelerator schemes in São Paulo have a large corporate behind them, much like what we see in Silicon Valley. We also see the emergence of venture builders across the city and that will continue to accelerate in the months to come,” Porcino says.
“Many global funds also have offices here, so we have companies investing, accelerating and buying. And I think that level of maturity can only be found in São Paulo when we look at the Brazilian landscape,” he adds.
In addition, Porcino points out that the startup scene in São Paulo is becoming a lot more focused, with “mini-hubs” across the city working on specific areas ranging from fintech and insurtech to edtech and healthtech, with infrastructure such as coworking spaces and associations dedicated to fostering these subject-matter communities.
“The shift from a generalist approach where people were testing out ideas across various niche areas towards specific areas of specialism is an evidence of a maturing ecosystem and that is definitely going happening in São Paulo.”
Challenges vs opportunities
On the other hand, São Paulo faces challenges to further develop its innovation ecosystem. According to Porcino, despite growing presence of local and international funds, improving deal flow and significant future potential, one of the main issues is still the flow of investment.
“In China, where there are plenty of unicorns, you see a lot of local investors backing local startups. Conversely, in Brazil it’s still hard to see institutional backers looking at startups and devoting 15 percent of their resources to innovation,” he adds.
“SoftBank’s [$5 billion fund to invest in technology companies in Latin America] is excellent news for us, but I’d love to see another 15 funds like SoftBank looking at Brazil, because their presence can effectively transform the companies they invest in as well as the entire ecosystem.”
Despite the growing international interest in Sao Paulo as a destination for anyone looking at innovation in South America, looking beyond São Paulo and Brazil is another area where the local ecosystem needs to improve.
“In order to succeed, a startup needs to become scalable and connect with external markets somehow, so that it can develop its own offering and even get acquired by an international competitor, so having global teams is a must, but it’s also a challenge,” Porcino points out, adding that the issue begins closer to home.
“Because our official language isn’t Spanish, Brazil ends up turning its back on Latin America. So the question to São Paulo entrepreneurs is, if your business grows, do you expand by setting up in Rio de Janeiro or in Lima, in Peru?”
Porcino observes that, conversely, many innovative businesses he has interacted with from countries like Italy or Spain have set their sights on international expansion from day one.
“A frequent topic of conversation with startups is around whether having an international strategy as an early goal is a must. While it is easier and safer to expand internally, there is a whole global market out there that companies here may not be tapping into,” he says.
“There is a middle ground in terms of internationalization that most local startups are not taking advantage of. But whoever has the capital or the mindset, will seize the opportunities.”
Further reading: São Paulo City Hall pushes a smart city agenda to improve internal processes and deliver enhanced citizen services for less.
