Letter From the GP: The Mirabilis Effect

During the turning points of technological cycles, it is wise  to refer to history to gain a better understanding of where we stand in our pursuit of innovation and value creation. 

Born in 1942, Yossi Vardi is an Israeli engineer who made a significant impact in the software industry. At the young age of 26, he founded Tekem, one of the first software houses in Israel, which he later sold. Afterward, he embarked on a career in the public sector while also venturing into the world of angel investing, a journey that would establish him as one of the most successful and prolific investors in the region. 

Vardi's activities are diverse and extensive, ranging from energy to international politics. His remarkable achievements include serving in various governmental roles and actively participating in peace negotiations between Israel and Palestine, Jordan, Egypt, and Syria. His effect on the tech industry is so significant that Israel21c has likened him to "Forrest Gump." 

In 1996, Vardi made an investment in Mirabilis, a company founded by his son Arik that created ICQ, one of the pioneering instant messaging applications on the internet. Only nineteen months later, Mirabilis was acquired by the American company AOL for a whopping $287 million upfront, with the potential to earn an additional $120 million subject to growth targets. 

Mirabilis' sale triggered what is now known as the "Mirabilis Effect," which gave rise to a massive wave of new companies and inspired a generation of entrepreneurs in the tech industry. This phenomenon occurred concurrently with the emergence of other "tech mafias" around the world, including PayPal, eBay, and Netscape, among many others. Today, these companies continue to be major players in the world of technology and venture capital, leaving a significant impact on the industry as a whole. The Mirabilis Effect, therefore, marks a turning point in the history of tech entrepreneurship and investment in the Israeli ecosystem.

Drawing a parallel to the Brazilian venture capital market, while recent months have seen a drop in investment volume, it is important to recognize that the country has produced a significant number of successful companies and experienced entrepreneurs. As a result, there is a relevant local pool of entrepreneurs and founding teams with the knowledge and experience necessary to build new technology businesses. 

We believe that the Brazilian venture capital ecosystem is now poised to experience its own "Mirabilis Effect," with the potential for a new wave of innovative startups to emerge and thrive.

Let's look at the data.

Volume of Capital Invested in VC in Brazil

Analyzing the current scenario in Brazil, the first quarter of 2023 had a significant drop in the volume of capital invested in technology startups.

Total Investment in VC in the 1st Quarter of Each Year - Brazil

The drop is less severe in the volume of companies financed in the earliest stages, but equally significant.

Total Investment in Early Stage VC in the 1st Quarter of Each Year - Brazil

One way to quantify the volume of entrepreneurs and founding teams with experience in tech startups is to understand the number of companies that received Pre-Seed or Seed checks, which means they raised funds from institutional investors to build the initial team, product, and search for Product Market Fit (PMF).

Number of Companies that Received Pre-Seed and Seed Funding in Brazil‍

(sum does not consider write-offs and M&As)

Taking into account the historical analysis of the Crunchbase dataset, there are 2,671 companies in Brazil that have received Pre-Seed funding, with an average of 1.85 founders per company. This equates to a potential pool of 4,941 founders and co-founders who have received financing up to the PMF stage.

Furthermore, when expanding the analysis to include founding teams, assuming an average of 2 executives per company, we can estimate an additional 5,342 people in this analysis. 

It is important to note that this calculation does not account for founders who have raised funding more than once or individuals who have been involved in multiple startups. While this does not necessarily mean that there are this many companies with Product Market Fit in Brazil, it is still an indication of the potential pool of qualified and experienced individuals with tacit knowledge in building successful tech startups. This underscores the potential of Brazil's startup ecosystem and the talent within it to continue to drive innovation and growth in the future.

How do we observe this evolution in our Dealflow?

To observe the evolution of Brazil's tech entrepreneurial landscape, we can turn to Astella's deal flow. Astella, which registers around a thousand new companies in the early stages of technology every year, provides a significant sample of the tech entrepreneur profile in Brazil and reflects the country's evolution in this space.

Despite the recent downturn in the investment market, we have not seen a reduction at the top of our funnel. On the contrary, in the first quarter of 2023, we observed a 36% increase in new startups registered in our funnel, indicating a continued growth in the number of entrepreneurs and founding teams in Brazil. This is a promising sign for the future of Brazil's tech industry and shows that the country has a wealth of talent and potential for growth in the coming years.

Dealflow Astella - Review: Astella investments by Founder Persona

Definition of Entrepreneurs Personas:

In the context of the tech startup ecosystem, there are four main personas that we can identify:

1. 1st Timers: recent graduates or teams below C-Level at old economy companies in various sectors. 
2. Executives: persona represents former C-Level executives in old economy companies transitioning to the tech startup environment. 
3. Mafia Techs:  individuals who have participated in the accelerated growth or diffusion of relevant technology projects with prominent positions in tech scale-ups. They bring a deep understanding of the tech industry and a network of contacts that can be valuable to any startup.
4. Superfounders: serial entrepreneurs in the technology world who have successfully founded and scaled multiple startups. They bring a wealth of experience and knowledge, as well as a proven track record of success in the tech startup ecosystem.

As we can observe from the table above, there has been a noticeable shift in the types of entrepreneurs in Astella's deal flow and investments. The presence of Superfounders and MafiaTechs in the Brazilian market has increased, while the number of 1st Timers and Executives has declined. This shift indicates a growing pool of experienced and successful entrepreneurs who can drive innovation, growth, and investment in the country.

Furthermore, an important consideration is that during the past low-interest rate cycle, many individuals jumped into entrepreneurship without proper preparation or mindset. However, in a cycle of VC investment downturn, not everyone feels motivated to embark on entrepreneurial journeys due to concerns about the lack of resources or the inability to build businesses without relying on poorly sustainable customer acquisition sources - a trait commonly observed during the peak period of VC investments.

Since 2010, we have remained faithful to our values and our investment thesis - which seeks committed missionary entrepreneurs capable of transforming markets, using technology in consumer businesses, software-as-a-service, and marketplaces, and building companies with intelligence and efficiency.

Where are we headed?

We believe that the tech entrepreneurship market in Brazil is on the cusp of experiencing a "Mirabilis Effect." Unlike Israel and other European countries that see Venture Capital activity as crucial for job creation, innovation, and economic development, Brazil lacks government programs to support development and risk investment. Nonetheless, the Brazilian ecosystem is thriving due to its abundant local talent and vast potential to bring efficiency to different sectors of a large economy using technology. 

With a record volume of funded companies, the number of Superfounders and founding teams of startups has grown significantly, generating a promising generation of Mafia Techs. Brazil boasts a previously unmatched availability of human capital for developing new technological initiatives and a market of over 200 million people with a significant demand for technology-based solutions.

Brazil has a long history of entrepreneurship, with iconic companies like Itaú, Boticário, Ambev, Gerdau, Klabin, Magalu, Aché, Cyrella, Bradesco, BTG, Sinqia, Dasa, or Locaweb, among many other, serving as global references in their respective sectors. And looking forward, will continue to foster innovation. 

As investors, it is our mission to support transformational entrepreneurs with capital, knowledge, and connections. Although we cannot predict the future, we understand the value of the entrepreneurial process for individuals, their teams, investors, and society at large. 

For those with a true entrepreneurial spirit, undertaking is the only way.