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 increasingly challenging task. LAVCA data shows that investments fell from $3.2 billion in 2022 to $2.1 billion in 2023, and plummeted to just $225 million in the first three quarters of 2024. This new reality forces entrepreneurs to rethink their financing strategies and explore less conventional, but often more sustainable, paths.
The startup ecosystem has been captivated by the idea that an innovative business necessarily requires 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 remains: what if we are buying a myth that benefits the financial market more than the entrepreneurs themselves?
Building an MVP – the simplest 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 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 even understanding its true growth potential. The fundraising model imposes pressure for artificial scalability, which can be fatal for businesses that need time to mature.
Companies like Mailchimp, Amazon, and Duolingo have gone their separate ways, exploring alternatives likebootstrapping, rounds with family,grants andcrowdfundingMailchimp, for example, never received any venture capital funding and was sold for $12 billion. Duolingo secured its first 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 raise more, and in the process, lose their identity and purpose. Many organizations end up hostage to investors who demand accelerated returns, forcing unnecessary pivots and decisions that can compromise the company's longevity. 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 beginning.
There are alternatives. THEbootstrapping guarantees total control. THEcrowdfunding Validates the market and generates cash flow without dilution.Grants and grants provide money without the need for repayment. Accelerator programs can be a shortcut to strategic connections, and pre-selling products allows customers to be the true initial investors. Airbnb started by selling cereal boxes to stay afloat until its business model was validated. 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 path. Venture capital can be a useful tool, but it should be seen as a strategic choice, not a prerequisite. Startups that understand their options increase their chances of building solid, sustainable businesses aligned with their founders' vision. The money is there, we just need to stop always looking in the same direction.
