Angel investing might be a good solution for startups looking for investors to provide advice, expertise and networking. It might also be a good solution for investors themselves as, if it goes well, the profit rate on the investment can be very high. In this article, we will learn how to become an Angel investor in Brazil.
Angel Investors in Brazil
Brazil has, as of 2013, more than 6.500 Angel investors venturing in around 1.500 companies, with an investment potential of BRL 2,6 billion. According to the organization Anjos do Brasil - a non-profit Angel investment network and Angel investing group in Brazil - the number of Angel investors in Brazil is slowly growing, as in 2012 there were only about 6.300. Angel investment on startups in Brazil grew 25% in value from 2012 to 2013, accounting for BRL 619 billion. Also, 95% of the investors are men, almost half of them are businessmen already in charge of a company, and the average age is 43 years old. Moreover, each Angel investor aids on average more than 2 projects.
The average Angel investment is BRL 96.000. In Brazil, these investors are more interested in venturing into the areas of IT and apps for smartphones. What most attracts Angel investors to a startup is a good project and the prospective return on the money invested.
Moreover, 80% of all Angel investors only invest in startups when they are contacted by entrepreneurs.
How to Angel Invest in Brazil
Angel investing in a startup is normally done by a group of two to five investors in order to reduce the risks for investors. For agilizing the process of investment, one or two of the investors are nominated lead-investors. The total investment for each startup is, on average, between BRL 200.000 to BRL 500.000 but can reach up to BRL 1 million.
Despite constant growth over the last few years the activity does not attract many people. As a result, Angel investor groups are limited in Brazil.
The tendency of systematizing the role of the Angel investor is entering Brazil as Startup Accelerators are becoming more numerous. There are around 30 companies of such type in Brazil, and nine of them are chosen every year to accelerate a total of 100 startups, thanks to the Startup Brasil program.
The largest Angel investment groups in Brazil are:
- Gávea Angels, acting in Rio de Janeiro
- Floripa Angels, acting in Florianópolis
- Jacard Investimentos, acting in Florianópolis
- São Paulo Anjos, acting in São Paulo
- Bossanova Angels, acting in São Paulo
Legality of Angel Investors in Brazil
When the Angel investor agrees upon the terms of their investment with the entrepreneur, they sign a Contract of Investment to formalize their agreement.
In this contract, the amount of money invested is stated as a symbolic payment for the right to future equity in the company. The contract also states that the investors does not hold any kind of bond, especially employment-related with the startup, apart from those already pre-established in the agreement.
Whenever the entrepreneurs or the investors are willing to sell their stocks to a third party, each of them has a limited amount of time - around 15 days normally - to exercise their preemptive rights and acquire the stocks that are being traded. A non-compete clause, stating that the entrepreneur is forbidden to leave the project - taking with them clients, employees and ideas - after it has already matured, is also present in the Contract of Investment.
Taxes for investing
As of September 2014 there is not a direct taxation regime for angel investments upon their realization. All the same, angel investments need to be declared in the investor’s Income Tax for the year in which they realized the investment.
Despite this, they can be taxed indirectly, as resources that are applied in a company undergo an average taxation of 40% over the value spent by the company. Those resources are used for employing, buying or hiring any service or to perform any other economic activities.
As the angel investor may opt between two different types of inputs - directly buying a share of the company’s equities or by mutual agreement that the input will be considered a loan, putting the startup in debt with the investor - the disinvestment process may be taxed differently:
- If the investor acquired equities from the startup, they will be taxed 15% on the profits made during the time they hold the equities;
- If the input was considered a loan, then the amount paid by the startup will be taxed on the investor’s Income Tax.
The Angel investment is subject to the same taxation process of a regular investment. Independent of the period between when the investment was made and the moment when the equities were sold, the tax is 15% over the profits made in the process.
Bill of law
A Bill of law favorable to entrepreneurship and especially Angel investing, is currently being passed in the Brazilian Congress but has yet to be approved. The Bill 54/2014 aims to benefit Angel investors who invested in Startups as these could deduct 20% from their Income Tax, up to BRL 80.000 a year. This proposal is not expected to be approved soon.
To benefit from the law, the investor must be a partner or shareholder of the company and is not allowed to be employed as a director, manager or a majority shareholder.
Obstacles for Investing
There are numerous obstacles in Brazil for the development of the Angel investing experience. The interest rate in Brazil is considerably high, discouraging small investors that would need to borrow money from a bank at a high interest rate because the profits made from a startup would not be enough to cover the interest rate.
Another factor that stands in the way of further expansion of the Angel investing experience in Brazil is legal uncertainty concerning the legal status of the Angel investor, who may face some problems with Labour Courts.
Surveys show that Brazilian businessmen are willing to invest their money in startups despite the risks but, due to the legal uncertainty, most of them give up. In the worst cases, due to legal complications, the Angel investor - despite not being a partner of the company - must answer to a labor process and, even though they have already lost what they invested in the Startup, it is necessary to spend more money in order to incur additional liabilities of the company.
According to Angel investors, another obstacle for Angel investment expansion in Brazil is the lack of tax incentives for Angel investors, although the sector demands it.
There are some success stories of startups that received aid from Angel investors in Brazil. Among them is Buscapé, which started as a free price comparison website and now covers areas such as network behavioral targeting, social commerce, discount platforms, online payments and digital commerce information. Buscapé was founded by four students in 1998 and after a little more than ten years, had over 700 employees and was sold for USD 342 million. The Angel investor for Buscapé was Aníbal Messa, who continues working with Venture Capital. He invested BRL 250.000 for 20% of the shares of the company back in 1999 and earned BRL 50 million when it was sold in 2009.
Another success story is Bematech, which was founded by two students in 1992 and received the Angel investment. Nowadays, Bematech has its equities sold on BOVESPA, the Brazilian stock exchange, with an annual revenue of over BRL 350 million and employing over 1.000 people. A group of eight investors, including Virgílio Moreira Filho, invested USD 150.000 for 50% of the shares of the company in 1991.