Last October, Kimball Thomas and Davis Smith launched Baby.com.br with $4.4 million in backing from an impressive group of Silicon Valley and international investors, including Tiger Global Management, Monashees Capital, SV Angel, Felicis Ventures, Chamath Palihapitiya and Thrive Capital. For SV Angel and Felicis Ventures, this marked the first time that either firm had invested in a startup based in Brazil.
Why the interest from these top investors? Well, for starters, the co-founders had started PoolTables.com with $20K right out of college, were able to turn a profit in their first year, and, since they didn’t raise any outside funding, were able to sell it in early 2011 for what Smith says was “a nice little profit.” But, more importantly, it gave them experience with how to work with international investors (many of which were in China) and how to run an eCommerce site.
But, with Baby.com.br, they’re tackling what they think is a much bigger area of the eCommerce market in a country that’s just starting to see its Internet adoption and Internet-focused businesses take off: Brazil. Forrester, for example, forecasts that the eCommerce industry in Brazil will grow at 18 percent year-over-year, with total sales expected to reach $22 billion by 2016.
It also helps that Smith has been living in Latin America now, on and off, for 13 years. He and Thomas identified Brazil as an ideal setting to launch an eCommerce business based on skyrocketing Internet penetration, the dramatic increase in B2C eCommerces businesses popping up over the last year, and its sizable population (just under 200 million). While the co-founders knew that it was still early to be entering the nascent Brazilian eCommerce space, they still felt that the market was close enough to an inflection point that it was worth it. You have to remember, Davis says, nine years ago, only 8 percent of Brazilians used the Internet. Today, that number has jumped to about 50 percent. Now that’s hockey-stick growth.
After a trip last year to Rio de Janeiro last year, in which Thomas struggled to find diapers for his young son, spending hours in the car and visiting at least three stores before finding a place that sold the right size, the co-founders decided to focus on the online baby market. Smith tells us that they saw a Brazilian baby market that was fragmented and lacked a clear leader, while the demand was high among young parents and disposable income in the country, on the whole was (and is) on the rise.
But growing a business in Brazil is not without its hurdles, which is why, rather than add a whole new variable to the list, they decided to go with a business model they knew would work, and took to replicating the Diapers.com biz model for the Brazilian market. Thus, today Baby.com.br is a full-service eCommerce site that hawks all things babies — toys, strollers, diapers, furniture, etc.
While Thomas and Smith bootstrapped PoolTables.com, maxing out personal credit cards and taking out second mortgages, they knew the second time around that Baby.com.br would be a much more capital intensive business. After all, Diapers.com raised about $70 million in equity before it sold to Amazon last year for $545 million. So, the co-founders (and cousins) decided to focus on raising money from investors that could help them build a defensible business model in Brazil, no easy feat in spite of the growing national interest in eCommerce.
Through their investors, Smith and Thomas got in touch with Angelica, one of Brazil’s most popular celebrities — a former childhood TV star and singer, and the current host of a popular children’s show. Being a young mother herself, she joined the team as the Chief Mommy Officer, recommending products for moms and just generally being a brand evangelist. Her husband Luciano Huck, also a famous TV star in Brazil (who Smith describes as the Ashton Kutcher of Brazil), has also been active investing in startups, like Crunchies winner Peixe Urbano, for example.
Considering both are active on social media (Huck was the first Brazilian to pass 1 million followers on Twitter), Smith says that their mutual participation has been a boon for the startup, helping them increase conversion and jump to 750K followers on Facebook. Although the co-founders aren’t eager to share growth numbers for competitive reasons, they did say that, by their third month in operation, they were seeing one million visitors to the site per month, had shipped 1,000 orders in a single day, and have seen double digit growth every month since. As a result, they’ve grown from a small team to over 100 employees in about six months.
But, again, growing a business in Brazil even with celebrity endorsement isn’t easy. For years, the country dealt with crippling hyperinflation, which in turn destroyed a generation of entrepreneurs in Brazil, Smith says, and leaving not only entrepreneurs but workers and consumers extremely risk averse. As a result, it makes it challenging to compete for talent, and hire away from the big, established multinational companies in Brazil. Not to mention the fact that equity is, generally speaking a novel concept in Brazil, nor does being backed by names like “SV Angel” or Tiger Global — which would likely be recognized in the U.S.
The cost of skilled labor is high, and so are salaries. In the U.S., the payroll tax is about 15 percent, whereas in Brazil it’s closer to 70. Companies generally have to pay at least one meal a day for their employees, they have to pay for transportation, etc. So, while the worker protections built into national policy can make it a dream for the skilled laborer, it’s not exactly easy on the pockets of a startup, when they’re having to pay 100 to 120 percent on top of salary. “Plus, it’s nearly impossible to fire someone, and you can get sued for just about anything here,” Smith says.
So, startups attacking the Brazilian market have to inspire prospective employees with their belief and their mission, they have to be able to explain the value of equity, as well as be aggressive and creative in the ways the recruit talent. The latter, at least, should sound somewhat familiar to startups in the U.S.
Baby.com.br, for example, recently put together a website specifically for a recruit, in the hopes that it would capture his attention and begin a dialogue. You can see the site here. It worked. As can be seen in the ensuing conversation, Henrique was intrigued and a few days ago officially joined the startup.
While this strategy has proved successful for the startup, Smith admits that it’s become a lot easier to recruit talent now that they have some traction, celebrities, and VC backing. There’s still a lot of bureaucracy in the Brazilian system, and bootstrapping is almost impossible, but the opportunity make it worth it, he says, as Brazilians are ready to consume online.
In turn, Brazilians are adopting social media fast and furiously, and, again, while it’s still nascent, the team believes they can help create a new kind of eCommerce in the country, and are working on slowly introducing fCommerce and social commerce experiences into their own model and into the Brazilian lexicon.
It remains tough for young startups to find the traction they need to survive, but the ecosystem is growing and startup networks are beginning to take off, and so Smith and Thomas hope that plucky young entrepreneurs can learn from the Baby.com.br story and, in turn, capitalize on an emerging market.
For more on Baby.com, check ’em out at home here.