By Luciana Magalhaes

Dow Jones Investment Banker

November 3, 2011 – Brazil has become a new stomping ground for the Internet start-up community. With financial support from local venture capital companies such as Monashees Capital and American investors such as Accel Partners, young Brazilian and foreign entrepreneurs are capitalizing on the country’s expanding economy and growing Internet usage. The question is: Will these investors, who are now racing for the next good idea, be able to cash out?

The sale in 2009 of BuscaPé, a website for comparing prices of products and services, to South Africa’s Naspers Ltd. for $342 million spurred investor interest in Brazil’s nescient online businesses, because it showed that strategic buyers could provide exits. Patrick Kann, of U.S. incubator Idealab, says the breakthrough sale “made investors look at the market more seriously.”

What Brazil hasn’t seen yet is a developed IPO market for start-ups. But the rapid growth of the country’s Internet market holds the promise that this may emerge. By the end of 2011, Brazil will have more than 92 million Internet users — a penetration of 46% — according to numbers compiled by Euromonitor. Between 2007 and 2011, Internet will have grown by nearly 60%.

Capital flows from private equity and venture capital are also on the rise, after a drop in 2008 and 2009 during the financial crisis. The Latin American Venture Capital Association says PE/VC investments in Latin America grew 120% between 2009 and 2010, to $7.2 billion. Brazil received 76% of the total last year and 62% in 2009. Across the region, very large investments ($100 million and above) doubled in the period; investments of $50 million to $100 million were up nearly that much (88%), and small investments ($25 million to $50 million) rose by 33%.

“In a few years, the exit options from Brazilian start-up companies will be similar to the ones available in other markets,” says Julio Vasconcellos, co-founder of Brazil’s Peixe Urbano, a Groupon-type deal site. His company, launched in 2010, has received investment from highprofile firms such as homegrown Monashees Capital and Silicon Valley’s Benchmark Capital.

Peixe Urbano is not discussing exit alternatives for its financial partners yet. But, according to Vasconcellos, today there are at least 10 Brazilian start-ups with annual revenues high enough (about $87 million) to justify a listing on the Brazilian stock exchange. The possibility of conducting an IPO on the Nasdaq or another international exchange is also being contemplated by some, he says. The first IT company to go public in Brazil was Ideasnet SA, which develops projects and participates in other technology sector companies. It went public in 2000. A few Internet company IPOs followed, such as the e-commerce site Submarino (now part of B2W.com), which was controlled at the time by the GP Investimentos  Ltd. group. Latin America’s leading Internet provider, Universo Online (known as UOL), also conducted an IPO in 2005, but its parent — the Folhapar SA newspaper group — is delisting it.

Internationally, the reference for the new generation of entrepreneurs in Brazil is Argentina based MercadoLibre, Latin America’s biggest e-commerce site. A successful IPO in 2007 demonstrated healthy investor appetite for such a company, which is now among the top Latin American companies listed on the Nasdaq.

“The financial exit geography has changed. We are part of a global market,” says Professor Cláudio Furtado, executive-director at the Center of Private Equity and Venture Capital Studies at Fundação Getúlio Vargas business school in São Paulo.

The globalization is changing the profile of the people behind the businesses as well. Many of the young Brazilian entrepreneurs embracing the Internet in Brazil have had international experience, or they have come from abroad to seek opportunity. Kimball Thomas and Davis Smith moved from the U.S. to Brazil only four months ago. On an earlier visit, Thomas found it difficult to locate certain brands or sizes of diapers for his son Jack. So, he and Smith, both of whom had worked at Internet companies and who were attending business school at the time, have so far raised $4.5 million from investors, including Monashees Capital (again) and Ron Conway, an American angel investor, to launch Baby.com.br, a retail site that caters to families and pregnant women. Its business model is similar to the U.S.-based Diapers.com. February’s financing round valued the company at $5.6 million. A month after it opened for business, Baby.com.br has had more than a million page views. The company is not disclosing sales numbers.

Purely Brazilian companies and ideas are also finding they can raise capital. Take Elo7, an online crafts marketplace, and Buzzero.com, a site for long-distance learning. Elo7, created in 2008 by Brazilian couple Juliano and Mônica Ipolito, recently received investments from Monashees and Accel; and Buzzero sold a 27% stake to Monashees after receiving $400,000 from angel investor Denis Engel, according to co-founder Robson Catalan.