Brazilian development bank BNDES has just launched a 100-million real ($30m) fund that will see the state co-invest alongside angel investors. Yet it comes only months after a new tax norm was released which will effectively disincentivise angel investing.
The new fund (Fundo de Coinvestimento Anjo) was launched on 14 November and will see the development bank put down 40% of the 100m reals, sourced through its investment arm BNDESPar, with the remainder to come from private investors.
The fund will invest up to 500,000 reals (provided an equal proportion of funding is secured from an angel or accelerator) in technology startups with an annual revenue of up to 1 million reals in sectors such as biotech, smart cities and nanotech.
Those startups that get initial funding can also qualify for a second round of funding from the fund – provided their annual revenue grows to between one and 16 million reals. In second round funding they will be able to tap up to 5 million reals.
Angels and accelerators that want to tap funding have up to 12 January next year to submit their proposals to BNDESspar.
Angel investing is growing in Brazil. Statistics released by angel investor association Anjos do Brasil in July show that the volume of investments by angels was up nine percent in 2016 to 851 million reals ($260m). Yet the number of angels fell by three percent.
The association estimates the country has 7,070 angels who each invest about 120,300 reals ($37,000) on average (the US in 2015 $24bn channeled into 71 000 deals).
The association reasoned that the figure climbed despite the recession, because most of these investments were in high growth companies that don’t depend on the economic situation to grow, while some investors moved from the local stock exchange with its negative returns.
No tax deductions for angels
A law introduced in October last year, as part of reforms to kick start the economy got investors wondering whether angel investments would be granted a tax deduction as is common elsewhere,
Yet in a tax norm gazetted in July, Brazil’s tax authority has ruled that angel investors will be required to pay tax on their investment – at a rate of between 15% and 22.5%.
This seems out of step with other jurisdictions which offer tax deductions (including South Africa – see this post). In the case of Turkey (see this post) a 2013 law allows angel investors a 75% corporate tax reduction should they hold company shares in recipient businesses for at least two years. The government also co-invests with angels.
Anjos do Brasil president Cassio Spina (pictured above) is concerned. In August he said the new tax norm could compel investors to put their money into safer bets like property or listed companies over more risky startup investments.
Spina says the tax authority is not listening to angels’ submissions. He points out that every real invested can generate a further 2.20 reals in tax.
BNDES’s move is noble. Along with a new equity crowdfunding rules which came into force in July (see this post) they could help edge up economic growth. Yet if Brazil is to expand faster a far more bolder approach is needed to unlock investment in startups.
But the lesson of South Africa is instructive to Brazil. A venture capital tax incentive there only took off after onerous measures were removed (see this post). Things then could still get better for angels in Brazil – but only if authorities are willing to adapt and learn.
Timm is a South African who writes on small business in emerging economies. He speaks Portuguese and lived in Brazil in 2014 and 2015. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a