The Brazilian startup ecosystem has never been hotter. The country has so far produced a total of 16 technology companies worth over $1 billion and international funds are rushing in.
Venture capital investments received by Brazilian startups in the first four months of 2021 is equivalent to almost 70% of the total VC investment in Brazil for the whole of 2020, according to a study by open innovation hub Distrito, published last week. The report noted that $2.3 billion has been invested in Brazilian companies between January and April, an increase of 187% in relation to the same period in 2020.
However, a set of practices currently in place prevent black entrepreneurs from fully participating in this burgeoning ecosystem. This is the conclusion of an unprecedented study, produced by São Paulo-based innovation hub and accelerator BlackRocks in partnership with global consulting firm Bain & Company.
The research incorporates and insights from interviews with the main agents active in Brazil, such as investment funds, accelerators, and innovation hubs. In addition, numbers from the Brazilian Startups Association (ABStartups) and other organizations of the country’s startups and innovation scene have been used.
Around 54% of Brazil’s population is black, according to statistics from the Brazilian Institute of Geography and Statistics published in 2020. In that context, the study aims to provide the ecosystem with subsidies to drive change, according to Maitê Lourenço, chief executive at BlackRock’s:
“Up until recently, part of the [ecosystem’s] reasoning for not addressing the racial inequality issue was the lack of data. Our study investigates the mechanisms in which the actors in the Brazilian ecosystem operate, and aims to contribute to the country’s current discussion around racial relations”, she argues.
Of the agents interviewed for the study, 76% say they never, or rarely receive proposals from black founders. A key factor associated to this is the use of referrals, considered to be very important or essential for 78% of investors, who use their own networks to originate opportunities.
Another issue identified in the report is the lack of diversity in the teams selecting investment opportunities in Brazil. According to the survey, 71% of the teams focused on startup investments employ only white professionals.
The criteria employed by those selecting startups to invest is also among the issues raised in the research. The study has found that 50% of agents prefer founders who have graduated from renowned universities, and 29% want to see career histories in corporations such as large consultancies, where historically, there has been an under-representation of black people.
Moreover, the study notes other hurdles founders typically face, including full dedication to the business, considered a mandatory requirement for financial support by 74% of the investors polled. Such requirements represent a major challenge for founders on lower incomes, and that tends to be the case for the black population in Brazil, according to the research.
Black founders in Brazil also receive less investment: 32% had access to capital to support their companies, according to the study, compared to 41% of non-black startups. Black entrepreneurs also receive less support from accelerators and other funding agents (49% versus 57% among white founders). All respondents believe that racial diversity in the ecosystem is nonexistent or far from ideal. Conversely, 91% of those polled say agents are not doing enough to change the current scenario.
The BlackRocks study also presents a set of six recommendations focusing on internal and external actions that agents in the Brazilian ecosystem can focus on to include racial diversity as a part of the leadership agenda.
Internally, the study suggests establishing processes and ways of working that promote diversity, such as monitoring racial diversity metrics in the deal pipeline and portfolio of startups in funds’ portfolios, as well as increasing the racial diversity of the agent’s team and network, as well as originating opportunities through non-traditional channels.
From an external perspective, the study recommends actions around taking responsibility for democratizing access to opportunities. These include encouraging greater racial diversity in startup teams, playing an active role to make information about the ecosystem available to all, as well as becoming an ally of agents that promote racial diversity in the ecosystem.
The results of the study are a reflection of structural racism in action in the Brazilian startup environment, according to BlackRocks’ Lourenço: “The situation that we see [in the Brazilian startup environment] in terms of race relates to the inequality that dates back from 1888 when slavery ended in Brazil and nothing was done to repair the damage to this population that was kidnapped from Africa”, she noted.
Lourenço notes that the fact the topic hadn’t been studied previously relates to the narcissistic pact of whiteness, a concept authored by Brazilian psychologist and activist Cida Bento: “It is in the interests of the groups retaining power that the historical context [relating to the black population in Brazil] and its consequences are concealed, to increase the chances their privilege will remain intact,” Lourenço adds.
Commenting on the findings of the BlackRocks study, economist and investor Anita Fiori noted that the investment game is all about trust and referrals play an important role in doing business, but it all boils down to the proactivity of the agent when it comes to having a diverse contact book and wanting to change the status quo.
“I do receive proposals from black founders because I actively seek them out; I get out of my comfort zone and often reach out beyond my usual network, and try to find connections that will lead me to [black entrepreneurs]”, the investor observes.
Based in Washington DC, Fiori has been focusing on building diverse investment portfolios and supports black entrepreneurs in Brazil, mostly females, with angel investment as well as expertise and contacts over the last decade. “White investors tend to intimidate black founders, and as a consequence black founders don’t feel comfortable pitching their businesses or meeting white investors”, she says.
According to Fiori, the proactive approach needed to drive diversity in the Brazilian startup ecosystem is largely absent in the networking and hiring practices of investment teams: “The way we select investment analysts and officers is very short-sighted”, Fiori points out.
“We don’t tend to focus on soft skills like teamwork, ability to perform in difficult situations, resilience, collaboration, which are precisely the characteristics black professionals have – that set of skills is crucial to businesses and that has been reiterated since the emergence of the pandemic,” she adds.
A review of current practices that reinforce racial inequality in the Brazilian startup scene is well overdue, according to Fiori: “The current situation is like watching a soccer game where no one kicks the ball into the goal”, the investor argues. “The thing is, everyone loses with the lack of diversity, including the male, white investors. That is because the best-performing funds and companies are the ones that have a diverse team.”
According to the investor, ensuring that black professionals can participate in the various aspects of the venture capital industry in Brazil is not only a matter of fairness but also good business practice. She notes that there are early signs of progress in the racial diversity agenda in Brazil, as corporates seek to advance their environmental, social, and governance (ESG) agendas, but there is a long way to go towards moving the needle.
“[Brazilian investors] had better walk the talk of diversity, because institutional investors and funds-of-funds are serious about it in the US and Europe,” Fiori points out, adding that industry bodies and associations, should also make efforts towards addressing the issue:
“Associations have a very important role to play in terms of setting best practices and principles for the ecosystem: they should look at what is being done in the US in terms of fostering the black founders’ community and do the same in Brazil as a matter of urgency,” she argues.
Failing to address the racial diversity shortcomings of the Brazilian startup will be detrimental from a broader perspective, according to the investor: “I don’t think [investors who fail to embrace diversity] are going to lose money, but they will lose the opportunity to earn more than they’re currently earning. They might also end up losing investors in the medium to long-run”, the economist points out.
“By only investing in the low-hanging fruit, [investors are] wasting an opportunity to drive change not only in the startup ecosystem but in the country as a whole.”