What is being done in Brazil to foster high-impact entrepreneurship?

The Role of FINEP (INOVAR) in promoting entrepreneurship

logo_finep

FINEP is a public company linked to the Brazilian Ministry of Science, Technology, and Innovation whose objective is to foster science, technology, and innovation in companies, universities, technological institutes and other public and private entities. In 1999, FINEP mapped the mechanisms for financing innovative companies in Brazil, reaching the conclusion that there were very few private equity and venture capital companies in the country and that this financing modality was virtually unknown by small and medium companies. In addition, pension funds, which managed more than US$ 70 million, did not have an appetite for the sector.

In October of 2001, along with the Inter-American Development Bank (IADB), FINEP founded INOVAR with the objective of fostering the development of a risk capital industry in the country. Through the Multilateral Investment Fund (MIF), the IADB contributed US$ 1.12 million out of a budget of US$ 3.7 million for a period of five years. In other words, INOVAR began with very little money to achieve its objectives.

INOVAR at first fostered the creation of the Brazilian Association of Private Equity and Venture Capital (Associação Brasileira de Private Equity e Venture Capital – ABVCAP). Another initially created mechanism was the INOVAR Venture Forum, which provides training for entrepreneurs and connects them with potential investors through events at which entrepreneurs can present their businesses and interact with one another as well as potential investors. Through INOVAR I, which lasted from 2001 to 2006, several private equity and venture capital firms, such as Status, DGF INVESTIMENTOS, and Fir Capital, managed to raise funds. During this period, Lupatech, an industrial valve company strongly geared toward the oil industry, participated in one of the first Venture Forums, and later, several rounds of investments were launched on the stock market in 2006. By attracting pension funds, there was a noticeable development of the industry in this period, especially for private equity.

With INOVAR II, which lasted from 2007 to 2012, the objective shifted towards the development of the next links in the chain, or rather, attracting venture capital firms and developing financing mechanisms for companies in their early stages (i.e. seed money). More recently, INOVAR started supporting the formation of networks of angel investors. Until a little less than five years ago, there were practically no angels in Brazil.

In the period from 2001 to 2011, INOVAR attracted 17 partners, including 11 pension funds and contributed to the raising of more than US$ 2 billion by approximately 24 funds. Operational costs during this period were considerably low; around US$ 13 million. To consolidate the entire venture capital chain, the future mission of INOVAR is to help take innovative start-ups public, given that the country’s stock market is currently mainly composed of large companies.

The Way Ahead

Over the last twelve years, FINEP has successfully helped to develop every single stage of Brazilian venture capital industry, from Private Equities, Venture Capitals up to Angel investments. Nevertheless, there is a strong geographical concentration of investments in Brazilian Southeast region (especially in São Paulo, Rio de Janeiro and Minas Gerais states). The Northeast and the South regions of Brazil have a lot of promising high-impact start ups but they are left behind by Brazilian VCs located in the Southeast region. However, the question still remains, how can Brazil close the geographical gap of venture capital investment?

Professor Gilberto Sarfati, FGV-EAESP

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