Case Study: eCommerce Startup in Brazil

Launch a Startup in Brazil

Davis Smith, an American serial entrepreneur who has successfully launched startups in both the United States and Brazil. With unique experience in both developed and emerging markets, Davis offered to share his story with us.

Please give us a rundown of your bio and startups to date.

In 2004, a couple months after completing undergrad, I co-founded PoolTables.com and grew the business to become the largest pool table retailer in the US. After five years in the business, my business partner and I became increasingly frustrated by our market size and decided the time was right for a change. We headed off to Wharton and Harvard to get our MBA’s, with the hope of identifying our next big idea during our two years in school. We sold PoolTables.com while we were in school and subsequently launched Baby.com.br, which is now Brazil’s largest e-commerce retailer of baby products. In the last twelve months we have successfully raised nearly $20M in venture capital from top tier VC’s in Silicon Valley, New York and São Paulo.

I hold a BA in International Studies from Brigham Young University, an MA in International Studies from the University of Pennsylvania’s Lauder Institute, and an MBA from the Wharton School. I  currently live in São Paulo, Brazil with my wife and two daughters.

What was your original motivation for getting into eCommerce instead of going the typical corporate route?

While in college I did an internship for a startup that operated retail stores throughout the Caribbean, targeting the cruise ship industry. After living in the Cayman Islands for 8 months, they offered me a full-time position back in the United States at their corporate office. Despite having a few classes left, I accepted the job and finished my last few classes in the evenings so that I could be a part of this great startup that I really believed in.

During this time I discovered my love and passion for entrepreneurship, so I began exploring entrepreneurial ideas in the nights and weekends. My cousin, Kimball Thomas, and I began vetting ideas and testing a few of the most promising ones. My exposure to retail and Chinese manufacturing contributed heavily to one of my ideas; that we could disrupt the very mature and stagnant billiards industry through vertical integration and a strong e-commerce presence. PoolTables.com quickly began to take over the industry.

Can you tell us a bit about the “origin story” behind “Baby.com.br” and how you decided to take the leap into Latin America E-Commerce?

When I was four years old my family moved to Latin America and I ended up spending the rest of my childhood in the region. As a young adult I returned to Latin America for a few years and when I discovered my passion for entrepreneurship, I knew I wanted to try to do something internationally focused, but just didn’t quite know what.

When running PoolTables.com I was introduced to the founders of Diapers.com and watched as their business explode. I was also a father of two little girls and understood their business well, but it never crossed my mind to do a baby focused e-commerce business abroad until business school. I had a number of very close friends who were Brazilian while I was at Wharton and one of them was telling me how he and his wife were expecting a baby and we started discussing entrepreneurship and the baby market in Brazil. It didn’t take long before I was convinced this was my next business venture.

What convinced you that Baby.com.br would take off?

With 200 million people, a rapidly growing economy and a population that is becoming increasingly “plugged-in,” it was the perfect place to launch Baby.com.br. Brazil has nearly as many babies born each year as the United States and e-commerce is growing at about 30% annually, which means great growth no matter what your business. Moms are an ideal online customer since after giving birth they are no longer willing/able to head into hour long traffic jams, just to buy some diapers. As we explored different e-commerce opportunities in Brazil, we were surprised that nobody was successfully executing in this vertical, so we made the leap.

What other opportunities do you feel still exist in Latin America for aspiring startups, especially those founded by gringos?

Anything in the internet space is a good place to start. In Latin America, I would focus primarily on Brazil, but Mexico, Argentina and Colombia are also strong emerging markets as well. It seems many internet companies are starting in Brazil and expanding pan-regionally as they reach scale. There are hundreds of business that still need to be started online in Brazil. There are of course a lot of B2C internet business opportunities as an enormous emerging middle class is gaining internet access in their homes, but there are also an increasing number of B2B opportunities as well.

What specific startups from the US do you think could be replicated very well in Latin America?

Peixe Urbano was recently awarded the best International Startup of 2011 award by TechCrunch and was the first daily deals site in Brazil. NetShoes.com.br is a shoe retailer that will reach a billion dollars in sales in the very near future, olook.com.br is similar to ShoeDazzle, BrandsClub is a successful flash sales site (think Gilt Groupe) and the list goes on. Most ideas require a bit of tropicalization to successfully execute in a new market and many business models aren’t well suited for other markets and end up failing.

To what extent does being a Gringo hamper an aspiring entrepreneur from succeeding in Latin America?

There are always challenges to doing business outside of your own country and culture, but there can also be advantages. We knew we needed to have investors and key hires who were well networked in Brazil since we didn’t have any previous exposure to the country. We ended up choosing a Brazilian VC to lead our Series A round over a large Silicon Valley VC, which was one of the best decisions we made. We also made a great early hire of a well connected executive in the internet space who has helped us build one of the best e-commerce teams in the country. Being an outsider can be challenging, but by building a strong local team around you, it can end up being an advantage.

You’ve successfully launched startups in the US and Brazil. Can you comment on the relative positives and negatives you faced in each destination?

US Pros: I never appreciated how easy it was to start a business in the US until launching in Brazil. Very few countries in the world make it easier to start a company than the United States. Additionally, employment law in the US is very business friendly.

US Cons: Lots of competition – few countries in the world have such intense competition in virtually every sector of the economy. Overall economy has been struggling for four years and will likely continue to struggle for a few more.

Brazil Pros: Competition is low and often unsophisticated. Unskilled labor is cheap (call centers, warehouse staff, etc.). Seemingly endless blue ocean opportunities. There has typically been very little startup capital in Brazil, which has kept a lot of innovation from happening, but in the last 12-24 months there is an increasing number of US and European VC’s making bets on Brazil. There are slightly higher margins in Brazil because of reduced competition and an often unpredictable tax law that forces businesses to hedge against potential tax liabilities. Living in Brazil is an adventure and a lot of fun.

Brazil Cons: Bureaucracy is stifling. They have the most complex tax system in the world (and some of the highest taxes … 70% payroll tax, for instance). Talent can be hard to find and very expensive, particularly in the burgeoning internet market. Cost of living is extremely high (São Paulo is 1.87X the cost of living in Manhattan). Employment law is burdensome. Distribution infrastructure is underdeveloped.

Any particularly humorous or outrageous stories about your time in Brazil?

Anyone who has spent time outside their own country knows that even the mundane is different in another country. When I first moved to Brazil I quickly realized I needed help doing basic banking tasks like writing checks and making online payments (things which are quite different than the way we do them in the US), but I wasn’t particularly embarrassed until I went to the bank for the first time.

As I entered the bank I saw large, bullet proof glass extending from the floor to the ceiling before you enter the main teller area. I pushed my way through a spinning door and found myself in an enclosed glass box. I figured the glass in front of me had to move somehow, so I pushed it, and then pushed it harder. No luck. It wasn’t moving. Maybe it was the sides that were supposed to open. I pushed those too. I waved my arms thinking a door might be activated by more movement.

Nothing.

At this point, everyone in the bank was staring at me, including two gun wielding guards who were looking at me with particular worry. I looked at them and signaled for help. One of them walked over and with one hand slid the glass door open. I hadn’t even thought of sliding the door to one side.

Do you have any warnings or precautions to give to prospective gringo entrepreneurs looking to break into Brazil?

Entrepreneurship is never easy. I’ve seen quite a few foreign entrepreneurs who have come to Brazil expecting to get VC money simply because they’re smart and have an idea. They ended up leaving Brazil disappointed.

Entrepreneurship is at least as challenging in Brazil as it is in the US. While there are many opportunities, there is also increased complexity and bureaucracy. Make sure you come in with an open mind, be humble, give yourself time to pivot or change your idea completely, and look to build a Brazilian team as quickly as possible. Be prepared to face major bureaucracy when setting up your business entity (it took us seven months – something that can take 24 hours in the US).

Get working on your permanent visas ASAP. You’ll need to make sure you have reached the minimum investment threshold, which means you’ll likely need to take outside investment to stay in the country beyond your six month tourist visa.

About Davis

Davis Smith is a serial e-commerce entrepreneur and is currently the Co-CEO of Baby.com.br.

In 2004, he founded PoolTables.com and successfully grew the business to become America’s largest pool table retailer before selling the business.

During his graduate studies at the Wharton School, Davis founded Baby.com.br, which won the Harvard Business Plan Contest. Since launch, he has successfully raised nearly $20M in venture capital from top tier VC’s in Silicon Valley, New York City and São Paulo. Baby.com.br has been recognized as one of Brazil’s top 10 startups.

Davis has lived in eight countries and spent thirteen years in Latin America. He also has extensive experience manufacturing and working in China. He enjoys adventure travel and has visited over 50 countries, including North Korea, Cuba and Brunei.

Davis graduated from Brigham Young University where he received a BA in Global Trade. He later attended the University of Pennsylvania where he received a MA in International Studies with an emphasis in Latin America from The Lauder Institute and an MBA from the Wharton School. He currently lives in São Paulo, Brazil with his wife and two daughters.

Blog: http://thewalnutstreetjournal.blogspot.com/

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