Partner Letter: Perspectives of a Venture Capitalist (and human being)

The pursuit of equilibrium between my optimistic and pessimistic inclinations stands as one of my most enduring struggles. At the outset of my career, I unwittingly favored my optimistic disposition, convinced that aspirations must seamlessly align with reality. Thus, with unyielding determination, I relentlessly confronted every obstacle. Meanwhile, my latent pessimism, concealed within the shadows, assumed a guise of virtue, intellect, and scientific rationale, evading potential alienation.

In this inaugural Astella Partner Letter of 2024, I aim to elucidate how I've grappled with and amalgamated these dual facets of my persona, as we scrutinize the Venture Capital landscape in Brazil this year. To confront the harsh realities head-on, let me begin by articulating the perspectives that animate my pessimistic leanings.

Having closely followed the trajectories of hundreds of entrepreneurs and enterprises over the past 16 years, I discern that in Brazil, startups have yet to match the velocity of growth or secure access to markets akin to their American, Chinese, or Israeli counterparts. Whether in terms of human resources, financial backing, or market scope, it's imperative to recognize this glaring disparity, particularly given the pricing dynamics prevalent in recent years, often mirroring those of more mature VC ecosystems.

Observing the cycles of technology, I discern that Brazil still resides on the fringes of innovation and transformative standards. These technological cycles unfold across layers of infrastructure, platforms, applications, and transactions. While infrastructure serves as the bedrock, comprising hardware, networks, and operating systems, platforms furnish the breeding ground for developing and implementing applications— the end products utilized by consumers, encompassing software and apps. However, in the Brazilian context, our ecosystem predominantly fixates on applications and transactions, with the more valuable infrastructural and platform layers remaining in nascent stages.

Furthermore, the swelling size of VC funds, while initially appearing advantageous, poses formidable challenges in terms of yielding returns. Currency volatility continues to impede international capital from gravitating towards the Brazilian asset class. Meanwhile, domestically, interest rates persist as a deterrent for local capital, which often gravitates towards more conventional and low-risk assets.

Lastly, we are still contending with the aftermath of inflated valuations from previous years, which continue to obscure the visibility on investment opportunities and foster an atmosphere of caution among investors. In such adverse scenarios, investors frequently halt their forays into VC, thereby relinquishing opportunities to partake in the most lucrative vintages.

Conversely, my optimistic side weaves a contrasting narrative. I reminisce about the nascent stages of entrepreneurial culture in Brazil, circa 2000 when Endeavor first began its crusade. Back then, the term "entrepreneurship" had yet to permeate the lexicon; entrepreneurs were simply dubbed "businessmen". Essentially, 24 years ago, the thriving ecosystem we now celebrate was only in its embryonic phase. Similarly, in 2008, when the ethos of "startup-ing" commenced, it felt akin to playing soccer with a makeshift ball, whereas today, we're poised on the cusp of continental leagues, with successive waves of entrepreneurs spearheading resilient, nimble enterprises, and venturing into increasingly expansive markets.

I'm heartened by the abundance of seasoned founders and prodigious talents still eager to explore the realms of technology and embrace the agile ethos of startups. It underscores the enormity of opportunities stemming from the burgeoning app usage across diverse categories in Brazil—where we rank as the 2nd or 3rd largest market for global platforms like WhatsApp, Uber, and Instagram—coupled with the underexploited potential in ecommerce, SaaS, recent recalibrations in digital asset valuations, and the prospects of AI. There's an abundance of untapped markets and ample room for growth.

Furthermore, over the past 12 years, our "Journey" funds have consistently delivered returns exceeding 40% annually, with the 2014 fund already netting returns sevenfold the initial investment. Our standout investments have appreciated over 72 times, while Astella has successfully exited over 12 companies. These milestones are pivotal, as in Venture Capital, past performance serves as a harbinger of future success.

I witness a burgeoning dynamism in the tech sphere, where a technology company changes hands every two days in Brazil. Despite boasting over 100 Venture Capital funds, the landscape pales in comparison to the competition among the 7,000-plus funds in the US. Yet, we possess a robust local capital market, with funds operating across diverse cycles distinct from their global counterparts.

As an investor relentlessly pursuing alpha and superior returns, I acknowledge that equilibrium lies in comprehending and navigating the inherent cycles—the peaks and troughs, expansions, and contractions, all while tempering the extremes of optimism and prudently moderating pessimism. It's a delicate dance, but one that ensures continued investment in the brightest prospects within Brazilian entrepreneurship.