Letter from the GP: Navigating the AI-Driven Investment Landscape in Brazil

AI, in my perspective, isn't just another tool but a monumental amplifier of human capabilities. It’s empowering, paving the way for vast opportunities for everyone. Startups that embed AI will inherently craft solutions faster and more efficiently.

With AI’s intrinsic dependency on vast data streams, it’s evident that data-rich platforms and enterprises will hold significant power and will create value. So far, most of the solutions come to address and enhance sales and marketing activities, customer success and development of technology, but it will certainly not be restricted to these activities and will permeate all the activities we need to perform on a daily basis, from optimization of workflows to diagnosis and treatment recommendations, personalized learning platforms to climate modeling.

These transformative changes prompt us as investors to ask:

• How do we sculpt our investment strategies in this new epoch?
• How will the dynamics of the startups we’ve previously backed evolve?
• What new AI-driven business models should we prioritize?
• What are the implications for construction of moats in the light of rapid pace product development?

To address these intricate questions, I turned to an article by Jerry Chen, a respected venture capitalist at Greylock Partners. In his article, Chen reexamines his 2017 work titled "The New Moats" and presents an updated concept called "the new new moats." He delves into the changing landscape of competition and technological innovation, with a keen focus on AI's role.

In this updated version, Chen illustrates how AI redefines his revolutionary three-layer model, which includes the System of Record, System of Engagement, and System of Intelligence (see figure below).

This model elucidates the structure of enterprise software. Chen contends, "The true value of a system of intelligence lies in its ability to interweave multiple datasets and systems of record. For instance, an application that amalgamates web analytics, customer data, and social data can better predict user behavior, churn, LTV, or even offer more relevant content. While intelligence can be built on a singular data source or system of record, such a position is more vulnerable, especially against a vendor who controls the data."

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In this landscape, how can startups, from an investor's perspective, harness Systems of Intelligence to strengthen their market entry barriers? I believe that in the age of AI, the ability to construct a resilient ecosystem that consolidates various data sources is paramount!

AI has shifted traditional competitive dynamics, making product differentiation and sustained entry barriers increasingly elusive. This shift casts doubt on the longevity of business models. While many major tech companies boast high gross margins but lack a positive EBITDA margin, it appears they may have underestimated the significance of distribution channels and building strong ecosystems. For a long time, relying on scale and network effects seemed sufficient. However, it's evident that AI has redefined the rules of competition

Furthermore, with acceleration in product development, building ecosystems and efficient distribution become even more vital. Rapid deployment and feedback gathering are crucial, especially in a world where data is key to enhancing products. Therefore, product market fit and go to market continue to be the most fundamental aspects of a new business, provided that data is being captured, even if those processes are led by third party/other stakeholder.

I believe startups and founders who recognize and integrate the importance of ecosystem-building into their strategies possess distinct competitive advantages. The capacity to rally complementary players around your product, crafting a comprehensive solution with partner support, is strategic. It not only accelerates the go-to-market (GTM) approach but also ensures outreach to diverse personas on a grander scale.

Teams adept at pinpointing challenging sectors and issues stand out. While AI doesn't alter the core dynamics or fundamentals of a startup, it infuses them with enhanced intelligence and capability to navigate complex problems and intrincated value chains. These represent the emerging frontiers ripe for exploration.

What I've invested on so far:

- Marketplaces: Generally, marketplaces facilitate ecosystem construction since they already integrate buyers and sellers. However, continuously adding services to both sides and fostering relationships with other players is vital for building solid and lasting entry barriers (Cayena, & Traive).

- Digital inclusion: after so many years watching the upsurge of innovation in telco network but very few on personalization and different strategies to delivery telco services, my hope is that TáOn will bring new perspectives by integrating several layers of technology and players into its platform.

- Financial inclusion: digital payment value chain is complex and fragmented. Most of the changes and innovation brought in place recently aimed to decrease costs and give access to a broader range of consumers and society in general. However, managing and dealing with a huge amount of players made the life of retailers and business increasingly complex. Destaxa brings a solution to help retail and businesses orchestrate and manage digital payment.

- Agritech: A sector accounting for over 30% of Brazil's GDP. It uses significant technology for agricultural production but has processes that are not very digitized and lacks management and marketing intelligence (Traive).

- Supply Chains and Logistics: Tools that provide insights and functionalities to optimizing sales conversion, last-mile delivery and distribution of goods in general, inventory management, purchases, and customer engagement (Estoca, Cayena).

What we also want to do:

- EdTech: I hope to see the emergence of various tools that assist in accessing education and in customizing and adapting teaching to the diversity of our population.

- HealthCare: Just as we can envision AI as a personal assistant for daily life, I believe there's room to create tools that assist chronic patients and the general population in maintaining healthier habits and monitoring the health of entire communities, aiding governments and healthcare systems in becoming more efficient.

- SmartCities and Transport Infrastructure: Urban planning optimization, traffic management, recycling, and waste management.

- Environmental Conservation: Economic sustainability of preserved areas, combating deforestation, and monitoring biomes and natural ecosystems.

If you've created marketplaces or vertical solutions that you believe can evolve into an ecosystem, please come talk to us.

In conclusion, I am very optimistic about the value that AI will unlock across all these segments in Brazil.  As investors we are thrilled to support these entrepreneurs and the transformations.

Lastly, I'd like to express my immense gratitude to:  Chang Xu Kauffman Fellow and investor at Basis Set Ventures, José Ricardo Brun and Lucas Abreu for sharing insights and knowledge, and challenging my views. Without their thoughts and  insights, I wouldn't have ventured to write this text.