Brazil Looks Like China Seven or Eight Years Ago, but Mid-Sized Companies Can't Survive
Brazil's tax code and labor law let both big companies and tiny teams survive — it's the mid-sized companies that get squeezed to death. Political swings left and right are themselves the one certainty, and founders treat them as a controllable variable.
The video won't play here. Listen to the audio instead:
The argument · tap a timestamp to hear it
Brazil's taxes are so complex they look deliberately designed
Brazil's regulation is very strict, especially on taxes. One investor showed Yunnan a formula for calculating Brazilian taxes that was as complex as a math problem; worse, the rules differ across states and municipalities — in apparel, selling fabric, selling clothes, going from state A to state B, from state B to state C, the tax calculation is completely different each time. One founder joked that the Brazilian government made it this complex precisely so it could take tax money out of companies at any time. The result is that only big companies have the means to hire professionals to sort everything out.
— Yu NanLabor law means lawsuits almost always win, and mid-sized companies get squeezed to death
Brazilian labor law is very strict. In China it's hard for an individual to win a labor lawsuit, but in Brazil a suit almost always wins, and the fines are heavy too. Making employees work overtime beyond eight hours or on weekends requires strictly paying overtime wages, otherwise a company's revenue can easily be fined away. So only the two ends of the ecosystem survive: either very early-stage small teams that don't hire many people, or big companies with the resources to hire many professionals. Companies in the middle — in the middle by both headcount and revenue scale — find it very hard to survive in this business environment.
— Yu NanWhat's missing isn't early-stage funds, it's growth-stage funds
Brazil actually has a lot of early-stage funds, and the number has kept rising compared with ten years ago, but the problem is ‘there aren't enough local growth VC funds’. Previously overseas growth funds like SoftBank were fairly active and invested in many local companies, but the market has been cold overall these past two years and these funds are scaling back too. One early-stage investor judges that companies at the C round stage may find it challenging to raise again this year. Local funds are slowly getting bigger and may later fill this gap, but for now it hasn't been filled.
— Yu NanCold email is basically useless in Latin America
Latin Americans place enormous weight on warm intros. In China, adding someone you've never met from a mutual friend's big WeChat group and stating your purpose still has some chance of being accepted; sending a cold email on LinkedIn gets a fairly high reply rate in both the US and China. But in Latin America you very, very much need an intermediary to make the connection, you need an offline, less businesslike environment where people know each other, you need people to become familiar with each other before they'll talk to you. Yunnan tried cold email himself; some people replied, but the odds were far lower than in the US or China.
— Yu NanToday's Brazil looks like China seven or eight years ago
Yunnan judges that Brazil today looks more like China seven or eight years ago, because what's hot now is marketplace and fintech, still part of internet basic infrastructure or the internet ecosystem. But he also stresses that many different factors will shape where the trend goes — the government's political ecosystem, the economic cycle, and so on. Although you can see money moving in, it's hard to say it will follow the same path. The population is over 200 million, second only to the US in the Western Hemisphere; nearly 40% are under 25, and the median age is about 32-33.
— Yu NanPolitical instability is itself the stable thing
Yunnan asked a primary-market investor how Brazil's political landscape affects business, and the answer was ‘our political instability is stable’. The meaning: from a foreigner's perspective, Brazil swings left, then right, constantly wavering; but that wavering itself is certain. The reason behind it is that electoral countries broadly are going through political and economic polarization. For local founders and investors, first they're familiar with it, and second they believe the impact can be kept within a certain range, without huge ups and downs — it won't be that today this industry is at its zenith and tomorrow it's gone.
— Yu NanBrazilian employees won't swallow their feelings and push the work through
Yunnan originally assumed Brazilians were very direct, but in fact, whether in daily life or at work, they don't much like face-to-face conflict. If they don't want to do something or don't like it, they won't say so in the moment — this resembles an Asian mindset. But what differs from East Asia: in East Asia you might not like it, but since the boss said so and it has to be done, you'll still do it; local Brazilian employees will definitely make you feel their emotions and dissatisfaction, and won't properly push the thing forward until their feelings are seen and addressed. Many people report that they're too emotional, too feeling driven; Yunnan thinks this is more like China's post-95s in the workplace.
— Yu NanWillingness to pay in Brazil's 2B is higher than China's
Brazil's 2B market is still developing and overall digitization is very, very early, but interestingly willingness to pay isn't that low — higher than China's and higher than Southeast Asia's. Two reasons: first, GDP per capita is still somewhat higher than Southeast Asia's; second, competition isn't that fierce, so companies don't want to do everything in-house themselves, and if there's a ready-made solution, companies are willing to buy it. Unit price depends on the specific product and can't be compared with the US, but willingness to pay is higher than China's. Many US 2B SaaS companies have local teams in Brazil and Latin America, and they do well too.
— Yu NanIn their own words · checked verbatim
But in Brazil a lawsuit almost always wins, and the fines are very heavy too.
但是在巴西的话一告一个准 而且你的这个罚款的力度也是非常大的
Yu Nan11:12
But the problem is there aren't enough local growth VC funds.
但是问题呢就是没有足够多的本地的这个growth VC fund
Yu Nan13:15
But I think in Latin America the line between politicians and criminals is very blurry.
但是我觉得在拉美 政治家和罪犯 他的那个线是非常模糊的
Yu Nan34:34
But when they come out, they come out completely — I'd only been there a short while when the World Cup hit, so nobody was discussing politics anymore.
但他们出来的时候 也出来得很彻底 就我去没多久 就赶上世界杯了 所以没有人在讨论政治了
Yu Nan35:34
Local employees will definitely make you feel their emotions and dissatisfaction; they won't properly push the thing forward until their feelings are seen and addressed by you.
本地的员工 一定会让你感受到 他的情绪和不满 他不会好好的 把这个事情推动下去 直到他的情绪 被看到和被你address
Yu Nan44:38
And the second thing is that competition isn't that fierce, so it won't want to do everything in-house itself, so if there's a ready-made solution, companies are willing to buy it.
然后第二个话 它的竞争没有那么激烈 所以它不会想把所有事情 都in-house自己做 所以如果有现成的solution 企业也是愿意买的
Yu Nan46:39
Figures
| Brazil population | about 200 million-plus | 23:21 |
| Share of Brazil's population under 25 | nearly 40% | 24:23 |
| Median age of Brazil's population | about 32-33 | 24:23 |
| Brazil GDP per capita | about 7,000-plus US dollars | 24:23 |
| Brazil GDP per capita ten years ago | about 13,000-14,000 | 24:23 |
| Depreciation of the Argentine currency over the past ten years | nearly 40-fold | 30:27 |
| Argentina official exchange rate | 1 to 180 | 41:38 |
| Argentina actual exchange rate | 1 to 300 | 41:38 |
| Argentina's average annual growth rate over the 40-plus years before 1914 | 6% per year | 42:38 |
Glossary
- warm intro
- Establishing contact through an introduction by someone you both know; in Latin American business socializing this route is almost mandatory.
- growth VC fund
- A fund investing at the C round and later, when a company already has scale; this type of fund is scarce locally in Brazil.
- Rappi Mafia
- By analogy with the PayPal Mafia, the group of founders who came out of Rappi and are active in investing in Latin American startups.
- The Edge of Democracy
- A documentary that follows Brazil's political rise and fall up close; the Latin America primer Yunnan recommends.
How to listen
Founders assessing Latin America or Brazil for going overseas, investors putting money into Latin America, and product leads who want to understand the local business ecosystem plus labor and tax rules.
The opening greetings and the closing call for survey responses can be skipped.