There are 21.7 million business establishments in Brazil, the majority of which (14.5 million) are privately owned. Apart from that, about one-third of establishments opened in the country each year do not survive beyond their second year. This says a lot about the type of entrepreneurship that Brazil’s economy still fosters. Several factors contribute to low survival rates for new businesses, from heavy bureaucracies to high taxes.
Despite the country’s recent economic recovery and the resilience of its job market, the latest statistics from the Ministry of Industry and Trade Development show that the rate of closures of new businesses is higher than the rate of new business openings.
For example, in the first few months of 2024 alone, nearly 1.5 million new businesses were founded (up 9.2 percent from the previous year), but more than 854,000 businesses closed, more than during the same period in 2023. increased by 15.5 percent. This may reflect his two years. Data from credit protection agency Cerasa Experian shows high interest rates are pushing the number of companies defaulting on their debts and seeking bankruptcy protection to record levels.
The good news is that the average time to set up a company in this country has significantly reduced from 4 days in 2019 to 21 hours in 2023. The evolution and gradual integration of computerized systems for registering and legalizing businesses in REDESIM, created as a national platform in 2007, in addition to various state and local initiatives over the years to reduce the cost of starting a business , and even its abolition, was essential to this development.
Last year, the Ministry of Industry, Trade and Development selected 17 priority areas to tackle the so-called “Brazil cost” — shorthand for the hoops companies must jump through on a daily basis in the country — but experts say none of the initiatives will have as big an impact as the recently approved tax reform.
The reform aims to simplify the country’s tax system by consolidating five multi-tiered taxes into two VAT-like levies, which is likely to have a significant impact on businesses overall. . According to World Bank data, companies need an average of 187 eight-hour working days to comply with tax laws in Brazil. Furthermore, the Inspur Business School in São Paulo estimates that tax collection disputes account for more than 70% of GDP in Brazil, compared to around 2-3% in other countries.
Most businesses in Brazil are born out of necessity, not opportunity. The typical Brazilian entrepreneur is black, young (between 30 and 39 years old), female, from the informal middle class, and has at most a high school education. In fact, only about 10 percent of Brazilian entrepreneurs hold a bachelor’s degree or higher, and only one in six earn a monthly salary more than five times the minimum wage (7,000 reais or US$1,370).
The most common activities of Brazilian companies are related to low-value-added service activities such as restaurants, apparel, and catering. This can be explained by the low level of investment required for such businesses and the fact that they are most often born out of hobbies or previous jobs, says a Brazilian non-profit private organization that supports entrepreneurs. Sebrae says. In an analysis of businesses that closed during the coronavirus pandemic, Sebrae found that a high proportion of business owners started their businesses after losing their jobs, had little experience in the field, and had little time to plan. Sebrae also pointed out that those managers were underinvesting, not managing expenses and revenues, and not perfecting their products and services.
Digitization is a must
A new industrial policy launched by the government of President Luiz Inácio Lula da Silva in late January promises to increase the digitalization of small and medium-sized enterprises in this sector from 23.5 percent to 90 percent by 2033. . Increasing this ratio is extremely important to improve the country’s overall digital competitiveness.
To this end, more than 2 billion reais (US$400 million) will be allocated over the next two years through government agencies and industry associations to provide various forms of services to 200,000 companies. Courses and digital tools will be offered to most companies, but specialized approaches will be more limited in scope. Consulting services to achieve industrial optimization, such as more energy-efficient production lines, will target 33,000 small and medium-sized enterprises. The adoption of 4.0 technologies could reach 360 companies by 2026.
But digitalization is not just a priority for the most developed sectors of the economy. During the COVID-19 pandemic, small and medium-sized businesses of all sizes and niches had to adopt new digital communication and payment strategies to stay in touch with their customers and keep their business running at a minimum. Now, they must continue to adapt to the increasing digital behavior of their customers.
According to a 2023 Sebrae study, digital commerce accounts for more than 40% of revenue for solopreneurs and small businesses on average. Around 70% of these businesses use digital tools for sales, primarily social networks such as WhatsApp (56%), Instagram (43%) and Facebook (23%).
One of the factors driving the increasing digitalization of business is increased access to banking and financial services. Between 2018 and 2022, the number of legal entities with bank accounts jumped from 11.4 million to 17.5 million. This is a 53.5 percent increase, the largest on record (dating back to 2005). This represents a significant improvement over the 18.9% increase in the number of individuals with bank accounts (totaling 188.3 million) over the same period.
However, access to credit remains a major challenge. A separate study by Sebrae in partnership with national statistics agency IBGE found that only three out of 10 small and medium-sized enterprises received bank loans last year. This happens because most companies do not have collateral to provide. In April, the recently created Ministry of Entrepreneurship, Microenterprises and Small and Medium Enterprises launched a loan facility for individual entrepreneurs and small and medium-sized enterprises with an annual income of up to R$360,000. The size of the loan will depend on each entrepreneur’s solvency, but will be guaranteed by a fund in which Sebrae has already deposited R$2 billion. The company expects that this program will allow it to provide loans of R$ 30 billion over the next three years.
Brazilian startups overcome all odds
Brazilian startups have grown over the past decade and account for more than half of Latin America’s unicorns (companies valued at more than USD 1 billion). The COVID-19 pandemic was a critical moment in this sense. The boost in liquidity promoted by central banks and governments to prevent the economy from shutting down at the peak of the health crisis also contributed to the increase in the size and number of IPOs. Most of Latin America’s unicorns were born out of this investment boom. There are currently 45 unicorn companies in the region, 23 of which are located in Brazil, with the latest unicorn being “born” in his April.
However, high interest rates introduced from 2022 onwards to combat inflation have turned investors away. Many global companies have exited Latin America as macroeconomic conditions deteriorated and the valuations of existing holdings declined around the world. The amount of venture capital raised by Latin American startups has fallen significantly, with the amount of venture capital raised by Latin American startups expected to drop significantly in 2023, up from more than US$17 billion in 2021, according to innovation platform Distrito. The amount was only US$3.1 billion.
But investors are wary not because of a lack of capital (some of the top regional and local investment firms continue to raise or launch new regional-specific funds), but because of unit economics and returns. This is because they place more emphasis on sexuality. Nevertheless, the ecosystem is confident that the best businesses in the region are yet to emerge, as difficulties and uncertainties are nothing new for entrepreneurs in Latin America. A new rate cut cycle also tends to get more investors back in the game, albeit slower than expected.
This mature innovation ecosystem is undoubtedly one of the reasons why more Brazilians want to become entrepreneurs. At least 48 million Brazilians will become entrepreneurs within the next three years, according to the latest edition of the Global Entrepreneurship Monitor – GEM, conducted in Brazil by Cebrae and the National Association for Entrepreneurship and Small Business Management Research (Aneguepe). He says he hopes to become . Taking into account the remaining 42 million people who have already started a business or taken some steps in this direction in 2023, Brazil will be the country with the “most potential entrepreneurs” after India.
However, when analyzing the share of entrepreneurs by population size, Brazil ranks eighth, with 30.1 percent of adults engaged in business. If tax reform, along with other initiatives, is successful and the country succeeds in turning more people into entrepreneurs through opportunity rather than necessity, it could move up a new spot in this ranking.
