AI steals investor attention; startups live in drought – 03/01/2024 – Tech

Enthusiasm for artificial intelligence drove the main investment rounds, with emphasis on the public offering of US$54.5 billion (R$271 billion) by chipmaker Arm —under the promise of new solutions focused on AI— and the investment of US$13 billion (R$65 billion) in the creator of ChatGPT OpenAI.

On the south side of the world, Brazilian startups are experiencing a drag on investments, which fell by 60% in 2023 compared to 2022, when negotiated values ​​had already fallen by more than 50% compared to 2021.

According to risk investors and entrepreneurs interviewed by the report, the scenario is the result of a reality check after the great enthusiasm with the digital economy between 2020 and 2021 and also the high interest rates abroad.

The level of the American basic interest rate between 5.25% and 5.5% is the highest recorded in 22 years and is not expected to fall before May, as signaled by the president of the American central bank, Jerome Powell.

It is the price of credit abroad that dictates access to capital for Brazilian startups in more advanced stages, in general, which seek investment, primarily, in the United States.

In this risk scenario, investors look for safer bets such as bonds linked to American debt or shares of consolidated companies, such as technology giants, which have soared in market value leveraged by the frenzy with AI — the main example is Nvidia, which had its market value more than doubled over the last year and, this year, it reached the R$2 trillion mark.

In 2023, there was no major investment capable of boosting any startup to the desired unicorn status, when the valuation reaches R$5 billion.

An exception was Pismo, which never revealed its market value until it was purchased for US$1 billion (almost R$5 billion) by Visa. The company, however, did not reach this figure after investment, but rather after the acquisition by the credit card operator.

The scenario is quite different from 2020 and 2021 — when Brazil gained 15 new unicorns. There are currently 24.

The number of investment rounds also fell from 1,452 in 2022 to 746 in 2023.

The scarcity scenario is even more pronounced for more mature startups that seek to raise larger amounts at once.

In the opinion of the founder of investment intermediation startup Bamboo, Felipe Moraes, the harsh conditions of the venture capital market led startups to focus on improving their management and accounting.

“In a conversation with an investor today, one of the first questions is always when the ‘break even’ will be” — the moment in which the company becomes profitable —, says Moraes.

With the boom in digital and creative economies, in which new giants such as Uber, Spotify, AirBnB, iFood and others emerged, investors lost sight of basic economic criteria and began to overestimate whether the business being evaluated came from an unowned market and whether there was a possibility of the value exploding — the so-called scalability.

In a period of negative or very low interest rates in almost all developed countries, speculators invested in several startups in the expectation that at least one or two would be successful.

As that business had the potential for exponential growth, a success compensated for all catastrophic forecast errors, according to the logic then adopted by venture funds.

“I’ve seen a lot of companies manage to raise investments millions of reais without having a product, the guy’s business was an Excel spreadsheet”, says the co-founder of Yellow and now angel investor, Guilherme Freire.

Grow, which emerged from the merger of bicycle and electric scooter rental startups Yellow and Grin, was declared bankrupt by the São Paulo Court in 2023, after judge João de Oliveira Rodrigues Filho, from the First Bankruptcy and Judicial Recovery Court of São Paulo, consider that the company was unable to honor its judicial recovery plan.

The mobility startup raised more than US$400 million (almost R$2 billion) in investments between 2017 and 2021.

One of the few technology subsectors that continues to create expectations of exponential gains is artificial intelligence, according to investors interviewed by Sheet.

Undertaking the development of large language models, such as ChatGPT, however, requires a cutting-edge data processing structure, generally concentrated in the United States, China and some European countries.

Brazil is still starting in this area of ​​artificial intelligence, years behind the pioneers of the USA and China.

For the chief executive of the startup data platform Distrito, Gustavo Gierun, Brazilians have as their “secret power” a large market of Portuguese speakers, a language that is not a priority for the main AI developers — Google, Microsoft, OpenAI and others American companies.

“We may have companies here that make less sophisticated models in general, but that achieve better results in Brazilian Portuguese”, he says.

Still, most companies here must use models developed abroad to solve local pain points and boost business productivity.

After leaving Grow, Freire invested in a platform to apply generative AI to small business management, Dolado, but still finds it difficult to reach a point where the new technology is reliable at a professional level. “For now, there are still a lot of people selling captivating narratives, as was the case in 2020 and 2021.”

Without the AI ​​bonanza, startups are rushing to show results. The platform that monitors layoffs in technology companies in the country Layoffs Brasil recorded 227 layoffs in the first 40 days of this year. 2023 had already been marked by a record number of layoffs, as shown by Sheet.

One of the alternatives to survive the lack of cash is to look for a buyer. Even if the startup is unable to sustain itself, it can offer a solution of interest to a larger company.

Throughout 2023, several analysts made the diagnosis that it would be a year with a greater number of mergers and acquisitions.

Consolidated data from Distrito show, however, that the number of mergers and acquisitions in Latin America fell from 253 in 2022 to 146 in 2023. Brazilian companies represent almost 80% of this pie.

For Gierun, this number indicates the resilience of Brazilian companies in the austere environment.

On the other hand, Freire, formerly of Grow, believes that this drop in purchases is yet another facet of the startup crisis.

“There are a lot of businesses that don’t plan properly and try to start adjusting their cash flow when they have the money to continue operating for six months,” he says. “At this time, there is desperation to find a buyer.”

The company ends up at such a point of deterioration that it is no longer attractive.

“I say this because that’s what I saw happen at Grow,” says Freire. He, however, did not want to evaluate the company’s final moments, as he was no longer part of the company.

By September 2023, the American startup monitoring platform Carta had detected the interruption of activities of 543 startups, a higher number than that recorded in the entire year 2022 (467).

“The Brazilian innovation ecosystem is closely linked to the American one, the scenario here should be very similar”, says Freire.