Latin American IoT startup founders received a welcoming news on May of 2021: a group of investors launched the sector’s very first dedicated fund in the region.
Fabio Iunis de Paula, Co-founder and Managing Partner at Indicator Capital, gives details on the initiative and explains why companies in the region are competitive enough to acquire a portion of the IoT market, expected to reach $875 billion by 2025.
BayBrazil: Indicator Capital, along with BNDES and QUALCOMM Ventures launched the first early-stage venture capital fund, Indicator 2 IoT FIP, focused on Internet of Things (IoT) and Connectivity in Latin America. Why IoT for Latin America? Why now? Does the region have the infrastructure prepared for it?
Fabio: Indicator Capital’s decision for an investment fund focused on IoT and Connectivity was due to the combination of two macro trends:
- the unique moment of the global digital transformation, in which the infrastructure in place has reached a tipping point allowing the acceleration of the Internet of Things; and
- Brazil’s readiness to embrace this technological revolution and drive disruption in Latin America, supported by the maturity of the National IoT Plan.
The National IoT Plan is based on the study “Internet of Things: An action plan for Brazil”, in an initiative led by BNDES and the Ministry of Science, Technology, and Innovation (MCTI). Its objective is to accelerate the implementation of the Internet of Things as an essential tool for the sustainable development of Brazilian society, transforming people’s lives.
BayBrazil: Indicator 2 IoT FIP fund expects to invest in 30 companies in the initial stage (Series A). How would you define a champion startup profile to access the investment of approximately R$ 10 million for ten years? What are the main characteristics you look for in these companies to select them for your portfolio?
Fabio: We help catalyze digital transformation opportunities that can create new markets and become essential for the survival of corporations. We look for scalability and impact through the systematic adoption of technology to form efficient systems of intelligence.
We seek to invest in Brazilian IoT startups raising a Series A round, which we may or may not lead. We strongly believe in collaborative investment rounds where our expertise can help create value, particularly where our specialization in IoT has the most use. Typically, we seek startups that have crossed the US$30,000 MRR mark and are ready to scale revenues beyond 2x per year. Last but not least, we truly believe that this is a people business in which extraordinary founders and diverse teams make all the difference.
BayBrazil: What are the security and privacy implications in this market entrepreneurs must be aware of, especially during the startup acceleration phase?
Fabio: Security and privacy are primary concerns of all phases of the development of any company. From startup to big corps, trust is a fundamental pillar of digital transformation. As the popular saying goes, trust is built in drops and lost in buckets.
Moreover, either due to regulations or public and private scrutiny, security and privacy are a cornerstone of digital transformation. As we build our portfolio, we also expect to find opportunities to invest in such technologies.
BayBrazil: Considering devices, hardware involved in IoT business and the volatile exchange ratio of Latin American currencies, what is your expectation on return on investments?
Fabio: It is important to mention that this is not solely a devices and hardware VC fund. Our thesis gravitates toward supporting the National IoT Plan to help build an IoT ecosystem. If, on the one hand, we do expect to invest in devices and hardware companies, on the other hand, we believe the majority of the investments will go the themes that scale, disrupt, and create significant impact – in general, a combination of hardware, software, and services. So, the IoT Ecosystem is a much bigger scope than devices and hardware. It is how you combine devices, sensors, data collection, connectivity, cloud, and security, in specific use cases creating new systems of intelligence.
We strongly believe that in the next 5 to 10 years, major national technology players will be born from our portfolio. This fund is denominated in Reais. Therefore, neither currency oscillations nor market volatility affects the return of this product. We work purely bottom-up, with a hands-on approach, and closely help entrepreneurs on their value creation journey. Exit opportunities are a natural consequence of our value-driven mindset that creates wealth for all stakeholders.
Indicator Fund 1 already had two successful exits, namely Social Miner and IOUU. Both companies achieved, with our support, successful exits through M&A. Finally, we also expect liquidity to continuously pour into technology, fostering more activity and better-resulting performance.
BayBrazil: The National IoT Plan developed by BNDES and MCIT expects to generate goodwill of approximately US$ 200 billion by 2025. How can it be possible? What are the main premises and obstacles to make it happen?
Fabio: According to the National IoT Plan, by 2025, IoT can add from U$ 4 trillion to U$ 11 trillion to the global economy, of which 38% to emerging markets. Furthermore, IoT may add to the Brazilian economy from U$ 50 billion to U$ 200 billion. The Plan considers three main levers of growth: 1. Manufacturing and rural opportunities; 2. Smart Cities countrywide; and 3. Social, Health, and Security, among others.
Indicator 2 IoT fund plays a backbone role in attracting capital into the segment. Therefore, we have already partnered with the leading corporate and institutional investors driving digital transformation in the region, namely: The National Development Bank, Qualcomm Ventures, Banco do Brasil, Multilaser, Lenovo, Motorola, Telefonica, among others. We partnered with the best LPs to drive value into Internet of Things startups, and we held a first closing of U$45M dollars. We expect to attract ten dollars from either local or international investors in new funding rounds for each dollar invested. Just imagine the proportions that this capital can achieve in future economic wealth!
The key obstacles to overcome appear in verticals and horizontals, where we also expect to play an important part. Indicator’s team is driven by the mission to help across different verticals, helping create technical clustering and achieving a critical mass of competencies. Moreover, there are system-wide opportunities to improve, such as better security and privacy protocols, reliable connectivity and interoperability, talent incentives, innovation ecosystem investments, institutional articulation, and so forth. These obstacles are all opportunities to build value together in the Brazilian IoT Ecosystem.
*(Please refer to the National IoT Plan for further and more detailed reference – “Internet das Coisas: um plano de Ação para o Brasil” – official BNDES page)
BayBrazil: The global IoT market was $330 billion in 2020 and is expected to reach $875 billion by 2025, according to The Market Data Forecast website. Can Brazilian IoT companies be competitive enough to acquire a portion of this market?
Fabio: Yes, they certainly can. No one country has a monopoly of good ideas, engineers, talent, creativity, or unique core competencies. Brazil has continental proportions and has a leadership role in different segments, such as agriculture and commodities.
We are experiencing a new narrative in which Brazilians have the opportunity to become protagonists of the international venture capital landscape. So far, we have seen generalist Latin American VCs and software-based unicorns. This year, we have already assessed about 300 early-stage IoT startups raising US$ 2 million in investment rounds. The stage is set for the next wave in digital transformation.