Startup Hubs Around the World: Sao Paolo
When considering startup locations around the world, it is no surprise that Sao Paolo, Brazil made the list. With a population of approximately 11 million people, the city has become a leader in fine arts, commerce, finance and entertainment industries; adding startup hub for the tech market is simply the next step for the city that exerts such significant influence in both Brazil and the world.
In our study of Sao Paolo, we’ll explore the 1) location of the city, 2) tax incentives, 3) legal incentives, 4) investors, 5) local resources, 6) the specialization of the city, and 7) startups to watch.
The largest city in Brazil, as well as the largest city in the southern hemisphere, Sao Paolo has been attracting the world’s attention for years as a tourist destination, and now is looking for the title of startup hub. The capital of Sao Paolo, Brazil’s most populated state, Sao Paolo wishes to position itself as a competitor in the global startup market.
Located along the eastern coast of Brazil, Sao Paolo is uniquely situated to impact the southern hemisphere. In some ways, Sao Paolo is the gatekeeper to the rest of Brazil, and ultimately South America – entrepreneurs know that if they want to reach Brazil, they must be successful in Sao Paolo. Due to the high amount of rain forest in Brazil’s landscape (almost 60% of the land is covered with rain forest and is uninhabitable), there is a strong urban concentration. Scarcity of available space with a huge population leads to high rents and costs of living – it can be more expensive to rent in Sao Paolo than in New York City.
One of the largest benefits to choosing such a large city is the number of choices it presents you for transportation options – and Sao Paolo is no different. With a large population, the city is thriving; however it is also booming to the point of traffic jams and heavy traffic that can tie up the roadways for hours. In spite of the traffic concerns, roads are still the primary means of transportation in and around Sao Paolo – the city is crossed by 10 major highways.
There are two main airports in Sao Paolo, one for international flights and another for domestic flights. As the 12th busiest airport in the world, Sao Paolo is bursting to the seams with people and a majority of them are arriving by plane. A subway system helps to move people throughout the city, in conjunction with the bus routes, and offer a viable solution for those who don’t wish to deal with the headache of traffic.
Interestingly, Sao Paolo boasts of one of the largest helicopter usage populations in the world. It is faster, more efficient and minimizes the amount of time spent stuck in traffic. Over 2,000 helicopter flights take place daily within the city.
Navigating the infrastructure of the city, it is essential to plan carefully for location of office and residential locations. Startup zones where housing and office spaces are mixed are in high demand for young entrepreneurs who often don’t have the resources to take advantage of the helicopter pads that dot the city’s landscape.
Advantages to choosing the city
The city of Sao Paolo is targeted to be the second highest growth cities by the year 2025, with an estimated population growth of 3 million people. With that many people flocking to the South American city, it is obvious that the city is experiencing unprecedented growth. By establishing a startup now, the entrepreneur can take advantage of a growing market and be established by the time the new growth opportunities arrive.
Located within the city are the offices of almost every multinational corporation in the world. Living in the economic center of Brazil, residents of Sao Paolo are surrounded by a multitude of companies and services.
It is extremely important for foreigners who are transitioning to Sao Paolo and may not be familiar with the language, customs or processes of the city to utilize professional services wherever possible to prevent someone taking advantage of them. Brazilians, however, approach business as an extension of trust – they will do business with someone they trust, making personal relationships more important in some ways than a business relationship. By selecting Sao Paolo as the location for a startup, entrepreneurs can capitalize on the Brazilian way of life: work hard, play harder.
Tax incentives for startup entrepreneurs in Sao Paolo are difficult to find. The business codes are complex and burdensome. Interestingly, World Bank ranked Sao Paolo 116th out of 169 countries in its ease of doing business report, naming it one of the worst cities in which to run a business. Incentives, paperwork and other concerns are issues that the city must address if it truly wishes to be competitive.
There are two types of taxes in Brazil – the estimated profits and the real profits. Establishing a company that is taxed based on real profits is expensive; the legal and set up fees can be cost prohibitive for a young startup. There is a ‘simples’ tax regime that offers a lower tax rate for young companies, but this 8% tax rate is not available to foreign entrepreneurs. Foreigners can expect to be taxed up to 17% on every invoice, and most startups are taxed on revenue, not profit.
In a similar ranking, Sao Paolo is sixth in the world’s number of billionaires – so the city does attract wealth. Finding ways to protect the wealth from taxes and excessive fees is a process so daunting it is recommended that an accountant be used.
To continue to be attractive as a startup city to entrepreneurs, Sao Paolo must find ways to re-work the tax structure and provide additional incentives to young companies.
The Brazilian government employs over 10% of the population, resulting in a large, complicated and expensive process for anyone wishing to establish a business. To startup a company in Sao Paolo, a foreign entrepreneur will need a national resident, as well as a lawyer and/or accountant to guide them through the quagmire of the paperwork and financial documents.
Labor laws and payroll issues can be daunting and overwhelming to someone not familiar with the Sao Paolo culture. The labor laws in Brazil favor the worker, stating that no one can work 44 hours without extra pay. In addition, they are eligible for 30 days paid vacation every year. There is a high taxation rate, with some estimates claiming taxes are up to as much as 75% of salaries. For the entrepreneur who does not understand the culture, adjusting to the Brazilian culture can be a shock.
There is no standard form for the entrepreneurship application, and the forms can be costly – adding up to thousands of dollars in expenses, before the company is even up and running. In addition, foreign entrepreneurs can expect to pay around $3000 and have the process take up to 70 days.
Corruption is high and expected within the Brazilian government, the “Brazil Costs” can add thousands of dollars to the initial set-up fees of corporations. Without the assistance of a lawyer, an entrepreneur may find themselves in a legal disaster if the proper paperwork isn’t completed or if other legal issues aren’t prioritized. Streamlining the startup process, reducing the amount of paperwork that needs to be completed and standardizing the legal forms will go a long way in encouraging entrepreneurs to start companies in Sao Paolo.
Recently, the Sao Paolo government launched an initiative to encourage development in the technology sector of industry. The Tech Sampa program is a three stage cycle designed to give new ventures that have high growth potential a framework to succeed, while connecting them with other startups worldwide. Backed by the Brazilian Bank for Economic and Social Development (BNDES), it is an opportunity for startups to receive needed funding along with a development plan that can help provide government support in a critical stage of a company’s life.
The first stage of the program provides initial funding of between $11,000 and $23,000, and allows the company to apply for additional loans from BNDES if needed. The second stage provides additional funds, as well as mentoring and infrastructure, while the third offers partnership with organizations that can supply venture capital or private funding.
With a large amount of wealth already in the city, there is great potential for angel investors. Companies must work to overcome the social barriers to investing in new technologies, and establishing a plan to address cultural differences. Investors in Brazil tend to focus on revenue and are often not willing to allow for the necessary pivots and adjustments that can occur in the startup phases of tech companies. Finding investors who understand the market and the process can be difficult in Sao Paolo.
An angel investor network, Anjos de Brasil, is the largest angel investor in Brazil and has offices in Sao Paolo. Having direct access to the investment group can be beneficial, and early entrepreneurs can take advantage of the lack of competition to secure funding in the growing market. Two accelerators are located in the city: Wayra and Acceleratech, providing additional investment opportunities and support.
Brazil Startup Report
There are unique features to any city that help to give it an edge over other locations. These resources may be a highly developed infrastructure, a well-organized startup community or a large number of willing investors.
Sao Paolo is an active city, with participation in festivals, parades, international sporting events and concerts. These cultural events all help to provide entrepreneurs with activities outside of the startup, making it an attractive place to live and work. This can help to draw entrepreneurs away from other locations which may not have as much to offer. There are a multitude of parks and other green spaces where people can go to relax outside of the workplace.
Brazil places a high priority on education, and Sao Paolo is home to over 200 secondary education facilities, which attracts young, well-educated individuals to the city. These individuals can become valued employees, become entrepreneurs or partner with companies to develop new programs.
With Brazil’s best higher education system, a highly skilled pool of employees, located in the center of the business decision making, Sao Paolo is uniquely situated to embark on their quest in the world’s startup market. The infrastructure of the city leaves much to be desired: airports are outdated and crowded, roads are gridlocked. However, the city is covered with more than 4,000 square miles of WiFi, and the City Hall recently hosted a hackathon for students to develop solutions for the city’s infrastructure problem.
Some of the other local resources that help to contribute to the growth of Sao Paolo:
Plug N’ Work: A co-working space that has a garden, as well as conference rooms, lounges and other office services, entrepreneurs can rent office space for an hour, a day or a month – depending on their needs. Coaching and seed funding are available through the co-working space.
Startup Brazil is a government sponsored program that is being used to generate interest and investment into the startups within Sao Paolo. The government invests in their chosen startups, and offers additional support and assistance through education and mentoring. The entire program was established to bolster the software and IT network already in place, and to motivate and encourage students to consider careers in these technical fields.
Sao Paolo is gearing up to become a tech startup hub, and have been having success in the e-commerce industry. There are a number of ecommerce companies already established in Sao Paolo, and the continue push towards ecommerce will grow as Brazil embraces the use of the internet. Already one of the largest users of Facebook and other internet sites, Brazilians are taking advantage of the global internet for shopping, social media and gaming. Continuing to expand their ecommerce industry will present additional challenges as the companies deal with shipping logistics and a crowded infrastructure, but promises to remain strong in the Brazilian tech industry. Additionally, they have a strong presence in the biomedical and fashion industries.
One of the challenges Sao Paolo faces is the resistance of the people to change. A majority of the people within Brazil would prefer to work for a company that has longevity – the government, banks, and big companies – rather than take a chance on an unproven company. Because there is little established technical talent, competition for jobs is slim at this point, making it easy to find (and keep) employees in the tech sector.
STARTUPS TO WATCH
Dafiti: Footwear e-commerce company, Dafiti raised almost $250 million in equity funding, making it one of the largest e-commerce growths in Brazil.
Shoes4You: A subscription based shoe company, Shoes4You is the first fashion brand in Brazil to sell their products exclusively online. With a personalized experience, customers receive new footwear fashions each month.
Peixe Urbano: A collective purchasing company, Peixe Urbano offers daily deals on activities in a city, while helping local businesses attract customers. With more than 20 million registered users, it is the largest ecommerce company in Brazil.
Buscape: A comparison shopping ecommerce site, it compares prices on more than 700,000 products online, making it the leader in price comparison and online shopping in Brazil.