Letter From the GP: As a Wave in the Sea

“A story boils down to great principles, not rules. One rule says: "this is how you have to do it". A principle says, "It works, and it has worked for all eternity." A story is about universal and eternal shapes, not formulas. A story is built with archetypes and not with stereotypes. The archetypal story unearths a universal human experience, which expresses itself in a way that is unique and appropriate to its context.” - Robert Mckee

Our journey as financiers of the future is guided by the constant search for balance between the "spirit of time" and "the spirit of depth", between the colors of the moment we live and the enduring principles of life.

The principles serve as guiding stars, as guides that indicate how things should happen, while we savor the trends of the moment. It is the sum of these two spirits that creates the future.

As an investor, these principles are an understanding of technology cycles, macroeconomic cycles and historical medians of Venture Capital fundamentals. It is based on these archetypes that we seek to generate the highest possible return for our investors, at the same time that we seek to help the greatest possible number of entrepreneurs to build the future.

It was through this lens, which we call the Base Rate Approach, that we returned more than R$230 million to our shareholders in 2021 and more than R$70 million in 2022, while making more than 25 new investments in future Brazilian technology leaders in the last 2 years. This is the result of our focus on DPI and not just TVPI (understand VC fund performance metrics). In this way, we guarantee performance metrics comparable to the top quartile of the United States, a leading country in terms of ecosystem maturity.

In the context of the exuberance of this cycle, we took the opportunity to sell the largest possible number of companies and shares in our portfolios. The sale of RD Station to Totvs, QultureRocks to UOL Educação, Kenoby to Gupy, Dr. Jones for O Boticário, for example, are some cases of how we surfed the waves of this period. In this rough sea, we prioritize caution and discipline with capital, remaining firm to the main pillars of our investment thesis:

• Invest as early as possible in the journey of high achievers (mainly pre-seed and seed);
• Allocate 50% of funds in the first two years and 50% in follow-ons in subsequent years;
• Diversify by business model (SaaS, Marketplaces, Digital Consumption)
• Invest in startups who commit to building proprietary distribution channels.

To paraphrase Buffet, it wasn't easy being greedy when everyone else was greedy, and it won't be easy being greedy when everyone else is scared.

Although many claim that we are entering a year that promises calmer seas, I am convinced that, with the support of solid mental models, built on more than a decade of investment in Brazilian entrepreneurship, that 2023 indicates to be a great year for investment.

One of the factors for my conviction is that we are facing an incredible crop of experienced Brazilian entrepreneurs. I remember that a decade ago, when I asked Israeli funds what the "tipping point" of that Venture Capital market had been, I heard from my colleagues that when more second- or third-time entrepreneurs began to appear, the market changed. This is exactly the point of offering talent in Brazilian entrepreneurship.

Furthermore, we know that Venture Capital is uncorrelated to other asset classes. Good entrepreneurs do not wait for presidential decrees, for example. They can spot big opportunities by solving big problems. And what we don't lack are big problems.

The third reason is the Brazilian digital consumer market. We are one of the top 3 marketplaces in the world for apps like Uber, WhatsApp, Instagram, TikTok, etc. We have usage penetration and we are evolving in consumption penetration. We can easily imagine a 10x greater digital consumption in the next 5 years and it will be the startups we invested in yesterday, today and tomorrow that will build this future in Brazil.

Finally, greater rationality in the investment market with startup graduation rates between rounds, time between rounds, size of rounds and expectations of traction back to levels close to historical medians, point us to a fertile moment of investments. Vitor Pajaro, from our team, went a little deeper into this topic here.

It is these principles and archetypes that lead us to contemplate the best vintage of Venture Capital of the decade. May 2023 come and bring good swell to all of us!