Why We Invested in Contabilizei
By: Ramneek Gupta, Managing Partner at PruVen Capital & Jared Katzen, Investor at PruVen Capital
We recently announced our investment in Contabilizei’s $63M Series C and wanted to share a bit of insight into why we found the Company to be compelling as well as share some of our thoughts into the future of SMB services in Latin America.
Filing Corporate Taxes in Brazil is Challenging
As a business owner, filing taxes in Brazil is hard, expensive and burdensome (filed on a monthly basis). Brazil is one of the world’s most complicated countries to file taxes in, having recently been ranked 184 out of 190 countries in difficulty by the World Bank — for reference, the US is ranked 36 out of 190. To further put this into context, tax compliance in Brazil requires an average investment of 200 hours per year, which must be handled by a dedicated tax accountant as, historically, DIY online accounting solutions akin to Quickbooks have not been permitted by law. All this adds up to small businesses spending an average of 7% of revenues on accounting services each month. Contabilizei has created an innovative platform that allows small business owners in Brazil to record and file their taxes online in an automated fashion that saves entrepreneurs both time and money. The Company’s platform replaces manual accounting practices with a proprietary web and mobile-enabled service, enabling small and medium businesses in Brazil to more easily and affordably track and file their taxable income.
Technology for SMBs is Significantly Underserved in Latin America
With 8M+ SMBs in Brazil growing by 600K+ per year there is a powerful opportunity to help these companies grow and manage their businesses with technology and tools that have traditionally only been available to large enterprises. We see significant opportunities in automation and digital delivery of solutions like business incorporation, tax filing, accounting, managing benefits and payroll, accessing growth capital, managing workforce and customer acquisition.
Acquiring Businesses at Inception, Yields Impressive Product LTVs and a First-mover Advantage to Layer on Additional Products and Services
One of the core acquisition channels for Contabilizei is through its business formation/registration service. This service enables Contabilizei to have an impressive first mover advantage to build a deep and engaging relationship with its customers as the first professional service used by an entrepreneur. Business formation is quite often the very first step taken by an entrepreneur, especially in Brazil, given the stringent monthly tax reporting requirements. As such, the free business formation service allows Contabilizei to onboard customers at inception and easily layer on it’s premium accounting services. Moreover, as the first professional service portal that SMBs engage with regularly, Contabilizei provides a unique point of access for additional SMB services such as financial services, insurance and employee benefits, which has already begun to see widespread adoption.
Strong Product Moat Bolstered by Over Eight Years of Product Development and Brand Building
Building an automated tax accounting software for Brazil requires an immense up-front investment in both market intelligence and product development. The Company has spent over four years increasingly automating it’s accounting solution to make it’s services highly scalable and more cost effective than incumbent accounting firms. For context, the average tax accounting firm in Brazil serves ~100 clients. A significant portion of Contabilizei’s tax accounting and filing product is automated. This impressive level of automation is possible because Conta has 1) automated the data ingestion process via bank statements and tax receipts, reducing a process that can take an accountant several hours to be nearly instant; 2) built a triaging questionnaire for exception handling, allowing prompt accountant attention to edge cases; and 3) automated the process of closing the books and e-filing taxes with the Brazilian tax authorities.
Repeatable Business Model Across The Entirety of Brazil
Each state and city in Brazil has its own unique rules and regulations with slight nuances on accounting rules and tax treatment. This has resulted in an extremely fragmented market characterized by small mom and pop accounting firms servicing a local municipal market. For SMBs, there simply hasn’t been a company capable of scaling it’s services nationally. Contabilizei’s product is built to scale with the capacity to service the entire country making an investment in building a brand with a consistent repeatable product an exciting value proposition that yields much stronger economies of scale compared with traditional accounting firms.
Proven Ability To Layer on Additional Products and Services
As a testament to Contabilizei’s first-mover advantage, the Company has already launched a partnership with BS2 a corporate-focused Brazilian neobank formed through the merger of Banco BS2, a traditional Brazilian bank and Weel, an Israel-based B2B fintech lender focused on financing Brazilian companies. Contabilizei holds many of the documents required for KYC natively in its platform, making the account opening and onboarding process for new customers significantly faster and more efficient compared with opening accounts at other commercial banks. Since launching the partnership at the beginning of 2021 the Company has seen a significant level of adoption of this product. Moreover, the Company has also begun to offer health insurance to entrepreneurs and their employees at a significant discount to what’s currently offered to individuals when purchased on the direct market.
New Wave of Digital Adoption Spurred, In Part, by Covid
Nearly every Contabilizei customer that we spoke with cited their ability to file taxes directly from their home or office by uploading files as a reason why they found the service so much more compelling than using a traditional accountant. Covid has made traveling to accountant offices to go through paperwork an extremely unappealing process during a time when lockdowns were encouraged. We view this trend towards digitally native solutions as a permanent shift in the way that folks in this region will look for and consume professional services. More broadly, we’re seeing digital adoption across the entire Latin American ecosystem blossom as folks increasingly turn to the internet for goods and services that were traditionally purchased at a store-front.
Contabilizei represents our second investment in Brazil and Latin America along with our investment in Pismo, and we’re excited to continue partnering with the amazing companies being built throughout the region in verticals including Insurance, Financial Service, Real Estate, Wealth/Asset Management and Digital Healthcare.
