You speak to different audiences, both domestic and international, about the state of innovation in Brazil. What main points do you focus on?
CAETANO: The key message is that the really big innovations in Brazil will come from start-ups. Large companies have a hard time innovating. Already some of them invite me to talk to them because they want to understand how they can innovate like a start-up. My answer is, “If you really want to do this, you need to find a way to work like a start-up.”
Is collaboration between large companies and start-ups a possibility too?
Definitely. Collaboration is fundamental for large companies seeking to innovate. At the Brazilian Association of Start-Ups, we organize an event called Pitch.Corporate, which is sponsored by Apex [the Brazilian Agency for the Promotion of Exports, a government body]. We invite 20 start-ups to do 5-10 minute pitches to large corporations. Large companies love this event. The idea is not to promote the acquisition of start-ups or attract investment for startups. Instead, it’s to create an environment where start-ups and large companies can start talking about how they might innovate together.
It seems this kind of collaboration
needs a lot of support.
In Brazil, large companies by and large don’t trust small companies to do a number of jobs. In part, this is a cultural issue: many people assume that large companies will always do things better than small ones. Clearly, this is not always the case. But things are beginning to change for the better.
What about other kinds of collaboration; for example, between companies and academia?
Collaborating with universities is very difficult for large and small companies alike. You have to talk to a lot of people, which adds complication. And universities don’t have a model to share the intellectual property resulting from the partnership. So there are many issues they don’t know how to handle. The good news is that you don’t have to restrict your universe to the national borders. At Samba Tech, we have had a
partnership with MIT since 2007. Every year, they send four MBA students to spend time here with us. This arrangement is good for the students, because they gain international experience, but it’s also good for us, because these students help us a lot in different areas.
We recently asked executives from developed and emerging economies how they expect to develop their business into new areas. The Brazilians were by far the most likely to prefer to do this in-house and among the least likely to take part in strategic alliances and joint ventures. What do you make of this?
This culture of building things entirely within one company creates a lot of difficulties for start-ups. If you’re an entrepreneur, you show big companies your product. They often won’t have something like it in their portfolio, but they think they can build it. What they don’t understand is that they often lack the necessary capabilities.
You have mentioned a number of factors that undermine collaboration between large companies and start-ups. What do you see as the main difficulties?
Intellectual property (IP) is a big issue. Large companies want royalties fortheir IP, of course, but they must share these royalties if they develop something with a start-up. And often they want to be the sole owners of intellectual property rights. Another key aspect is trust. Start-ups are synonymous with risk. Nobody knows whether they will be here in the near future. So it’s understandable that large companies may hesitate to engage with start-ups on strategic projects. On top of that, the way large companies and start-ups develop products is totally different. Large companies try not to fail and spend a lot of time working to develop the best product they can sell. Start-ups believe in “Fail often, but fast…and cheap,”. It’s hard to build trust between such different companies. But, as I said, things are slowly getting better.
It seems that a core issue for established and start-up companies could be their different approaches to risk.
Indeed. For large companies, taking risks means the possibility of losing a lot of money. They may adopt a start-up approach and say, “Maybe we can spend less money and, if we have to fail, let’s fail fast.” But in large companies, if you fail it could mean you’re not good enough and you will probably be fired. In start-ups, the typical response to failure is, “Okay, let’s do it again and try to improve.” It really is a matter of organizational culture.
Can this cultural gap be narrowed? And if so, how?
Possibly. Let me give you an example of what we seek to do at Samba Tech. We try to create trust through endorsement and reputation building. We invest a lot in public relations, and we use one client to sell our services to others. Often before large companies become clients, I visit them several times. Then they visit us and see how we create products, how we manage our key performance indicators. I even spend time with their CEOs explaining the start-up mentality and talking about the benefits for them if they move in our direction. Only then do they become clients. So we try to change their mindsets. Before making a sale, we help them rethink their culture.
Do large companies come to you realizing they have a problem?
Many large companies are starting to sense that they have to change, but they don’t know how. The old way of thinking about innovation no longer works. They are losing talent: some of their people are leaving, either to work for start-ups or to build their own start-ups. But the key driver for them is when they start losing market share to smaller companies.
Culture and mindset are clearly crucial. Have you also seen examples of success where companies built processes, systems, reporting hierarchies and other “hard” structures that encouraged collaboration?
I don’t believe we have many companies in Brazil that are set up to do that. Often, it is not a priority for CEOs, because they are under pressure to achieve short-term goals. Meanwhile, middle managers want to start a revolution along those lines, because they feel the company is not moving fast enough. But their companies are not prepared or organized for it.
How do you see the role of the capital community, including venture capital, in Brazil?
Brazilian venture capital is too conservative. A lot of people here invest at the seed or angel stage. Then at the Round A stage, you may find a few people investing. And after that, start-ups hit a wall. It is very hard to find investors for Rounds B, C and D. That’s why there aren’t many initial public offerings or acquisitions of start-ups in Brazil. The situation sets up a vicious cycle: venture capitalists don’t invest more in Brazil precisely because there are so few possible “exits” (IPOs or acquisitions by large companies). In the United States, you see these exits all the time. Our competitors in countries such as the United States and Israel got investment on the order of US$110 - 144 million; we got US$5 million. But as I mentioned earlier, large companies in Brazil are starting to change their mindsets. They are realizing they can’t innovate much internally. So this could be the right time for them to start acquiring start-ups. Maybe we’ll see more of that in the coming years.
Thank you very much. This has been very interesting and useful. It would be a pleasure to stay in touch and continue our conversation.
That would be a pleasure. Thank you.
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