By Alberto Azevedo, investment specialist and CEO of the Alby Foundation
In recent years, the venture capital market in Brazil has shifted from euphoria to contraction. If there was previously an excess of liquidity driving investments in promising startups, today the scenario is different. The rise in the Selic rate and the greater selectivity of investors have imposed a brake on the ecosystem, making fundraising an increasing challenge. LAVCA data shows that investments fell from US$ 3,2 billion in 2022 for US$ 2,1 billion in 2023, and fell to just US$ 225 million in the first three quarters of 2024. This new reality forces entrepreneurs to rethink their financing strategies and explore less conventional paths, but many times more sustainable.
The startup ecosystem has been captivated by the idea that an innovative business needs, obligatorily, from traditional investors to exist. Venture capital rounds, inflated valuations and the obsession with raising millions early on have become almost a rite of passage. Meanwhile, the question that remains is: what if we are buying a myth that benefits the financial market more than the entrepreneurs themselves?
Build an MVP –simpler version of a product that can be launched in the market – and validating an idea are crucial challenges, but venture capital is not the only, and perhaps not even the best option for this stage. In the rush for quick money, many founders end up diluting their stake too early and lose control of the company before they even understand its true growth potential. The fundraising model imposes pressure for artificial scalability, what can be fatal for businesses that need time to mature.
Companies like Mailchimp, Amazon and Duolingo have taken different paths, exploring alternatives such asbootstrapping, rounds with family, grants andcrowdfunding. Mailchimp, for example, never received a cent of venture capital and was sold for $12 billion. Duolingo secured its early development phases with research grants. Jeff Bezos already took the first steps of Amazon with an investment from his own family.
The traditional investment model creates a vicious cycle, where startups raise funds to grow, grow to capture more and, in the process, lose identity and purpose. Many organizations end up hostage to investors who demand accelerated returns, forcing unnecessary pivots and decisions that can compromise the longevity of the business. The culture of grow or die led giants like WeWork and Peloton to burn billions before realizing that sustainable growth should have been the priority from the start.
There are alternatives. THEbootstrapping ensures total control. THEcrowdfunding validates the market and generates cash without dilution. Grants and grants provide money without the need for repayment. Accelerator programs can be a shortcut to strategic connections, and the pre-sale of products allows customers to be the true initial investors. Airbnb started by selling cereal boxes to sustain itself until it validated its business model. A Pebble raised over $10 million on Kickstarter before manufacturing a single smartwatch.
Entrepreneurs need to free themselves from the narrative that there is only one way. Venture capital can be a useful tool, but it should be seen as a strategic choice, not as a prerequisite. Startups that understand their options increase their chances of building solid businesses, sustainable and aligned with the vision of their founders. The money is there, we just need to stop looking in the same direction all the time.
