What is it like to be an entrepreneur in Brazil?

Brazil has 21.7 million active businesses, but the vast majority (14.5 million) are one-person endeavors. Apart from that, about a third of businesses opened in the country every year do not reach their second year. That says a lot about the kind of entrepreneurship the Brazilian economy still fosters. From the high burden of bureaucracy to elevated taxes, several factors contribute to the low survival rate of new businesses.

Despite the recent rebound in the country’s economy and the resilience of its job market, up-to-date statistics from the Industry and Trade Development Ministry show that the rate at which new businesses close is higher than that at which new ones open.

Only in the first months of 2024, for example, nearly 1.5 million new firms opened (up 9.2 percent from the previous year) but over 854,000 closed, 15.5 percent more than in the same period of 2023. This may be a reflection of two years of high interest rates, which have driven the number of companies defaulting and seeking bankruptcy protection to record levels, according to data from Serasa Experian, a credit protection agency. 

The good news is that the average time to open a company in the country has fallen drastically, from four days in 2019 to 21 hours in 2023. The evolution and gradual integration of computerized systems to register and legalize businesses in REDESIM, a national platform created in 2007, in addition to various state and municipal initiatives throughout the years to reduce or even eliminate opening costs, were essential for this development.

Last year, the Industry and Trade Development Ministry chose 17 priority areas to tackle the so-called “Brazil Cost,” shorthand for the hoops that companies must jump through on a daily basis in the country. However, experts say that none of the initiatives will have a greater impact than the recently approved tax reform.

By merging five multi-tiered taxes into two VAT-like levies, the reform aims at simplifying the country’s tax regulations, which will likely have a significant effect on businesses in general. According to World Bank data, complying with tax laws in Brazil requires an average of 187 eight-hour workdays from businesses. Furthermore, tax collection disputes account for more than 70 percent of GDP in Brazil, according to estimates from São Paulo-based Insper business school, whereas in other countries it’s around 2 or 3 percent.

Most businesses in Brazil are born out of necessity, not opportunity. The typical Brazilian entrepreneur is black, young (between 30 and 39 years old), female, non-formalized, from the lower middle class, and has a high school degree at best. In fact, only about 10 percent of Brazilian entrepreneurs have a bachelor’s degree or more, and no more than one-sixth earn more than five times the minimum wage (BRL 7,000 or USD 1,370) a month.

The most common activities for Brazilian businesses are related to low-added-value service activities, such as restaurants, apparel, and catering. This could be explained by the low level of investment required for such businesses and the fact that they almost always come from a hobby or previous job, according to Sebrae, a Brazilian non-profit private organization that supports entrepreneurs. In an analysis of the companies that closed during the Covid-19, Sebrae found that there was a higher proportion of owners who opened up the business after they lost their jobs, had little experience in the area, and had less time to plan. Sebrae also noted that they invested less, did not control expenses and revenues, nor did they perfect their products and services.

Digitalization is a must

The new industrial policy launched by President Luiz Inácio Lula da Silva’s administration in late January has committed to increasing the digitalization of small businesses in the sector from 23.5 percent to 90 percent by 2033. Increasing this percentage is critical to improving the country’s overall digital competitiveness.

To this end, more than BRL 2 billion (USD 400 million) will be allocated over the next two years through government agencies and sector associations to serve 200,000 companies in various ways. While courses and digital tools will be offered to most companies, specialized approaches will be more limited in scope — consulting services to implement industrial optimization, such as more energy-efficient production lines, will target 33,000 small and medium-sized industries, while assistance to implement 4.0 technologies could reach 360 companies by 2026.

However, digitalization is not a priority only for the economy’s most developed sector. During the Covid-19 pandemic, small businesses of all sizes and niches had to adopt new digital communication and payment strategies to keep in touch with their customers and hold their businesses minimally afloat. Now, they must continue to keep up with their customers’ growing digital behavior.

According to a 2023 Sebrae survey, digital commerce accounts, on average, for more than 40 percent of the revenue of individual entrepreneurs and small businesses. Approximately 70 percent of these companies use digital tools to make sales, mainly WhatsApp (56 percent) and social networks such as Instagram (43 percent) and Facebook (23 percent).

One of the factors contributing to the greater digitalization of businesses is the increasing access to banking and financial services. Between 2018 and 2022, the number of legal entities with a bank account jumped from 11.4 million to 17.5 million — an increase of 53.5 percent, the largest on record (dating back to 2005). This also represents a more significant advance than the 18.9 percent increase in the number of individuals with bank accounts (totaling 188.3 million) in the same period.

Access to credit, however, remains a big challenge. Only three in ten small businesses obtained a bank loan last year, according to another survey by Sebrae in partnership with the national statistics institute IBGE. This happens because most do not have any collateral to offer. In April, the recently created Entrepreneurship, Microenterprise, and Small Business Ministry launched a loan line aimed at individual entrepreneurs and small companies with annual revenue of up to BRL 360,000. The size of the loans will depend on the payment capacity of each entrepreneur but will be guaranteed by a fund in which Sebrae has already deposited BRL 2 billion. The entity hopes the program can provide BRL 30 billion in loans over the next three years.

Startups against all odds in Brazil

Brazilian startups have been thriving in the last decade, answering for more than half of Latin America’s unicorns (companies valued at USD 1 billion or more). The Covid-19 pandemic was an instrumental period in this sense. ​​The liquidity boost promoted by central banks and governments to prevent economies from stopping during the peak of the sanitary crisis also helped intensify the size and the number of IPOs. Most Latin American unicorns were born in the wake of this investment boom. The region currently has 45 unicorns, 23 of which are in Brazil – the latest was “born” in April. 

However, the high interest rates put in place from 2022 onwards to fight inflation pushed investors away. Many global firms pulled back from Latin America as macroeconomic conditions worsened and valuations of their existing holdings worldwide fell. The venture capital volume raised by Latin American startups dropped drastically: from more than USD 17 billion in 2021, Latin American startups raised just USD 3.1 billion in 2023, according to innovation platform Distrito.

Investors’ caution, however, is not due to a lack of money — some top regional and local investment firms continued to raise and launch new funds dedicated to the region — but to a greater focus on unit economics and profitability. Nevertheless, as hardships and uncertainty are not a novelty in Latin American entrepreneurs’ playbooks, the ecosystem is confident that some of the region’s best businesses are yet to come. Although slower than expected, the new interest rate cutting cycle also tends to bring more investors back into the game. 

This maturing innovation ecosystem is undoubtedly one of the reasons why more Brazilians want to be entrepreneurs. The most recent edition of the Global Entrepreneurship Monitor – GEM, carried out in Brazil by Sebrae and the National Association of Studies in Entrepreneurship and Small Business Management (Anegepe), indicated that at least 48 million Brazilians want to become entrepreneurs within the next three years. Considering the other 42 million who already had a business in 2023 or took some step in this direction, Brazil is the second country with the “most potential entrepreneurs” after India. 

However, when analyzing the rate of entrepreneurs by population size, Brazil ranks 8th, with 30.1 percent of adults involved in business. If the tax reform is successful, in addition to other initiatives, and the country manages to transform more people into entrepreneurs through opportunity rather than necessity, it could climb new positions in this ranking.