Member: Valor Capital Group
Executive: Scott Sobel, Co-Founder & Managing Partner
News Coverage: Search LAVCA

LAVCA spoke with Scott Sobel, Co-Founder & Managing Partner of Valor Capital Group, about how there is an opportunity for U.S./Brazil cross-border VC  investment and how the tech opportunity in Brazil compares to China.

LAVCA: Please give some background on Valor Capital Group. When was it founded? What is your AUM?

Scott Sobel: Valor Capital Group, founded in 2011, is an investment firm focused on U.S. and Brazil cross-border opportunities with a presence in New York, São Paulo, and Menlo Park. The firm operates across two investments strategies: Venture Capital and Growth Equity.

Valor is one of the most active U.S. based venture capital firms in Brazil. We have a dedicated local team managing a Brazil/LatAm portfolio -diversified across sectors and stages.

Valor invests in early stage consumer and enterprise internet companies in Brazil, and growth-stage U.S. based global dominant technology companies, in support of their expansion in Brazil. Valor’s portfolio companies address large and inefficient markets with transformative technology and innovative business models. The greatest opportunities for innovation and impact come from serving the unmet needs of the emerging middle-class. Thus, Valor’s highest concentration of investments have been in Fintech, Edtech, Healthtech, SaaS, and Logistics.

Valor believes international connectivity is key to unlocking value in Brazil and other emerging markets. Valor’s partners were responsible for opening Google and PayPal in Brazil and LatAm as well as running Ideiasnet a publicly held venture capital firm in Brazil. Valor’s brand resonates with entrepreneurs and investors based on the firm’s differentiated cross-border strategy, strong track record, operational support, and unique access in the U.S. and Brazil.

The firm is aligned with a group of world-class institutional investors, international development organizations, and influential family offices, to advance activity in Brazil and connecting Brazil to the global technology ecosystem.

LAVCA: What stages do you target when investing in Brazil? Have there been any challenges finding later stage investors for this market for follow-on investments in your portfolio companies? Why or why not.

 Scott Sobel: Valor is primarily an early stage (Seed to Series A) investor in Brazil targeting 10 – 30% equity ownership. There has been a scarcity of capital in the Series B+ rounds in Brazil, which has required us to look at the international markets to support the growth of our portfolio companies.  Over the course of the last four years, our Brazilian portfolio has attracted over US$600m in follow on funding primarily from international institutional investors that was integral to enabling our companies to have the runways to grow and appreciate the way they did during one of Brazil’s most challenging economic environments.  We believe it is not only important to help bring these capital flows into the market, but also the intellectual capital flows (knowledge and know how) to support our companies growth, and ultimately arbitrage the multiples and valuations between markets. For example, Goldman Sachs led the Series B and C rounds in CargoX, General Atlantic led the Series C round in GymPass, and Tiger Global led the early growth round in Stone.

LAVCA: How often does Valor Capital co-invest? Who have you co-invested with? Do you seek out local or international co-investors (or both) and why?

Scott Sobel: Valor takes a very collaborative approach to partnering and co-investing with local, international, and strategic investors. When it comes to choosing co-investor partners, we look for investors that have a complementary approach to ours. Over the past five years, Valor has been amongst a small number of early stage investors in the Brazilian market, where we have all co-invested together including monashees+, KaszeK Ventures, 500 Startups, Redpoint eVentures, and eBricks. Our most active co-investment partner on our cross-border deals has been Andreessen Horowitz.

LAVCA: With three unicorns in the first quarter of 2018 and coming off the back of a record investment year for VC in Brazil, why would you say there is so much momentum in Brazil right now?

Scott Sobel: First, let’s take a moment to compare the Brazilian and Chinese venture markets.  Back in 2003, China had US$1b in venture capital, most of which was local and non-institutional money.  Last year, Brazil first reached US$1b in venture capital investment. Given that Brazil has 1/6 of China’s population and 1/5 of its GDP, it is fair to extrapolate that Brazil can support a venture capital sector that is 7 to 8 times larger than today’s.  Much like China, Brazil is the largest economy and hub in its respective geography, making Brazil the core to any LatAm strategy.  The momentum we are seeing in Brazil stems from a combination of a large market, maturing venture ecosystem, positive secular trends, and growing exit opportunities that create a highly attractive environment for venture and growth returns.

LAVCA: Do you have any concerns about the macroeconomic and political environment in Brazil? Why or why not?

Scott Sobel: Despite political uncertainties with the upcoming election, constitutional reforms will continue and the economic recovery is well on its way. Inflation is continuing to come down, automotive exports and manufacturing are on a crescendo, and interest rates are at their lowest since 1957, with many economists predicting a 3% growth in GDP for 2018. The Bovespa was the best performing emerging market in 2017 and is off to a strong start in 2018 with Brazilian public companies expected to see an average increase of 53% in net profits this year. These facts underscore the strength of the Brazilian economy and they will continue to drive urbanization and support the inclusion of an internet savvy middle-class consumer.

LAVCA: Do you anticipate expanding your scope geographically to look for investment opportunities in other markets? Why? 

Scott Sobel: Valor has a Brazil centric strategy, however we do invest in global breakout and dominant technology companies looking to enter the Brazilian market.  Some examples of where we have invested and helped U.S. tech companies enter Brazil include Coinbase, Udacity, and Viagogo.

LAVCA: What can you tell us about your investment in Gympass. How and when did you invest and what role have you played in supporting the company’s rapid international growth? 

Scott Sobel: We initially met Cesar Carvalho the Founder and CEO of Gympass just out of business school from one of our other entrepreneurs. From the onset we were believers in Cesar’s vision, go-to-market strategy, and ability to attract talent. Valor was a seed stage investor in Gympass, led the Series A round, and has followed on in subsequent rounds. As part of our Series A investment, the company focused on a B2B2C model, which proved to be a much more capital efficient approach to scaling the business. Today, Gympass is the largest global network of gyms with thousands of corporate clients and lives under its benefits program.  When the company reached significant scale in Brazil and had set their horizons on international markets, we introduced Atomico who led the Series B to support their European expansion. A few years later, when the company was looking to expand to the U.S. and globally, we introduced General Atlantic who led the Series C round. We have been proud to support Gympass’ growth as it becomes a national champion for Brazilian technology companies that expand globally.

LAVCA: Please describe some other recent investments

Scott Sobel: We have over 25 companies in our Brazilian portfolio, so there are several companies that would be worth talking about.  With that said, let me dive into one recent investment we made in ecommerce and provide some color on our thesis to invest in this space, but from a less capital-intensive approach. We developed a strategy to invest in ancillary businesses that help make ecommerce more efficient, targeting payments, logistics, and marketplaces. On the payment side, we invested in Stone which is one of the largest payment processors in Brazil.  In logistics, we invested in Mandae and CargoX that does first and last mile logistics respectively.  As for marketplaces, we recently invested in Olist that enables SMBs to access Brazil’s largest ecommerce sites and manages their product inventory, pricing, fulfillment, customer service, and payments in one single marketplace. This is a large fragmented market with over 500k offline and online retailers, importers, distributors, and manufacturers. The Olist team has demonstrated the ability to grow their merchant base aggressively and sign contracts with Brazil’s largest marketplaces. The company is growing fast and hitting an inflection point showing significant long-term value.

LAVCA: How has the Brazilian startup ecosystem evolved since you first started investing in the country?

Scott Sobel: We find ourselves in a fortunate position to build on, what I believe, my father’s exceptional job as the former U.S. ambassador to Brazil, building a bridge in the public sector between two great nations. We have become a bridge in the private sector, specifically within the tech communities which we are passionate about. We started investing in Brazil’s tech market in 2011. At that time, we saw huge white space gaps that were analogous of the late 90s in the U.S.  Since then we have seen the market grow dramatically to become the 5th largest internet and mobile economy in the world and the second largest market for social media. Brazil is a large, connected, and engaged market with a fertile ecosystem for startups to thrive in. Moreover, we have seen a generational shift in risk tolerance whereby entrepreneurship is now considered a viable career path. As a result, we have seen an increase of the quantity and quality of entrepreneurs in the country.  As opposed to a few years ago where we saw more of the “copy paste” type of businesses, entrepreneurs are now shifting to a mindset of tackling more complex problems through efficiency driving models, organizing and optimizing transactions versus merely leveraging demand.  One example is CargoX, the Uber for Trucking, which raised rounds from Goldman Sachs and Uber’s co-founder Oscar Salazar. Cargo X is disrupting the US$33b Brazilian overland freight market (3rd largest in the world with 2.6 million trucks) by offering an alternative to an inefficient, fragmented system of over 220k offline freight broker/shippers.

LAVCA: How do you view the exit opportunity in the next 1-3 years? It seems there has been a resurgence of IPOs especially out of Brazil. What is driving this and do you have plans to IPO any of your current portfolio companies?

Scott Sobel: The exit environment for Brazilian startups via M&A is strong and will continue to be so as innovation cycles accelerate, funding cycles compress, and corporates are compelled to use M&A as part of their R&D strategy.  The tech sector has been the most active M&A sector for the last three years in Brazil, making up around a fifth of the US$78b total deal volume.  Initial Public Offerings of Brazilian tech companies is another trend to watch, and 2018 kicked off on a positive note with PagSeguro’s successful launch on the NYSE, having raised about US$2.27b (the largest IPO since Snap in March).  Another strong indicator of the growing maturity of the ecosystem is the increase in later stage deals, which now account for nearly 70% of VC dollars (compared to 20% in 2015).  The IPO route in the U.S. is definitely a trend to watch for Brazilian best of breed technology companies, PagSeguro is a good example, which Stone should follow in the near future.

LAVCA: Why did you join LAVCA?

Scott Sobel: We have been involved with LAVCA since inception. LAVCA has established itself as the voice and convener for the PE/VC community in Latin America. In particular for us, LAVCA plays a central role in accelerating the development of the ecosystem, bringing together managers, investors, and thought leaders. The tech community is highly appreciative of the organization’s efforts in this front, be it through its discussion forums, knowledge sharing, or networking opportunities. At Valor, we leverage the industry data and strong research that is put together by the team at LAVCA.