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Global Startup Trend for 2014: Consider Brazil

With global events, a rising middle class and major investment opportunities, all eyes are on Brazil.
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It's time to look beyond the sunny beach-party exterior. More than just a tourism magnet that attracts 5 million-plus visitors every year, Brazil is South America's largest economy, with gears turning busily in numerous sectors.

Brazil's population has increased from 96 million in 1970 to about 200 million today. As a result of government investment and solid economic growth, 40 million of those people entered the middle class over the past decade. And with two major global events on the horizon--the FIFA World Cup in 2014 and the Olympics in 2016 in Rio de Janeiro--Brazil is poised as a dynamic magnet for entrepreneurial investment.

Alex Nascimento, founder of 7BrazilConsulting in Santa Monica, Calif., has taken dozens of individual investors on exploratory trips to his native country. "The next five years will be the hottest years for Brazil," he says. "We're going to have significant investment from the government as well as new foreign direct investment. If new tax legislation gets passed, that will give a boost to Brazil's stocks and publicly traded companies. In the coming years, I see Brazil becoming the best it can be."

Nascimento points to real estate and the aforementioned tourism as key investment sectors. An Olympic host city typically needs 50,000 to 60,000 beds; Rio reportedly has only 25,000. Cosmetics are another major opportunity. On average, Brazilian women spend 40 percent of their disposable income on cosmetic products, according to Nascimento.

But the hottest sector is technology. Brazilians have increasing purchasing power, but many live in underserved or rural areas where they don't have access to the goods they want. So e-commerce is booming, estimated to be worth $12 billion annually. The fastest-growing Latin American e-tailer, sporting-goods company, saw web sales increase a whopping 9,000 percent in 2012, according to Internet Retailer.

There is a vibrant accelerator scene funding startups within Brazil, and investors from outside the country are also bullish. California-based SVB Capital invested in Brazilian venture capital firms last year through a $340 million fund. "The Brazil economy in the next 10 years will be one of the third or fourth largest economies in the world," says Aaron Gershenberg, a managing partner at SVB. "If you're going to look at some diversification in your portfolio, in the innovation economy Brazil is a very natural geography to have exposure to."

Meanwhile, entrepreneurs from the U.S., Germany and France have already set up shop in the country, undeterred by high taxes and startup costs. New tax incentives for tech companies are on the horizon, possibly clearing the way for even more.

Still, there are reasons to be cautious--cultural challenges, for one. A subscription service called Shoes4you failed recently, and many observers blamed the local concept of jeitinho, which gives a wink and pat on the back to consumers who uncover ways to get things for free. When customers figured out that they could cancel their Shoes4you subscriptions indirectly through their banks, rather than through the company--eliminating the charges, but still getting their shoes at the discounted membership rate--many did. It was reportedly a key factor in the company's demise.

There are other reasons for measured enthusiasm.

Nascimento says it can take six months to get a business license. Private companies, such as bus operators, have notoriously awful customer service. The countrywide protests this summer highlighted some of the frustrations of a population putting more and more into taxes and getting seemingly little out. But the places where such services fall short represent major opportunities for entrepreneurs to do things better--even amid an atmosphere of high setup costs and thick red tape.