How Spain is Gaining Ground in Europe’s Startup Space

An inexpensive market compared with other European countries, Spain’s decentralized entrepreneurial geography and its appealing lifestyle are making it a startup hotbed

Bloques de apartamentos residenciales se alinean en una calle en el barrio de Lavapiés de Madrid, España, el jueves 25 de junio de 2020. Fotógrafo: Paul Hanna/Bloomberg
November 30, 2022 | 01:55 PM

Madrid — Spain is emerging as an attractive place for those looking to innovate, with the country gaining ground among the most prominent countries in the European startup ecosystem, with encouraging prospects for entrepreneurs despite the volatile global macroeconomic outlook.

Speaking to Bloomberg Línea, industry insiders analyzed the factors that have led the country to grow in this area in recent years, with advantages ranging from more attractive prices, presence in various business industries, territorial decentralization and even the country’s lifestyle.

However, they also noted that there are challenges to contend with, such as lower government incentives compared to other countries, and a focus on startups that are nascent rather than those that need to be scaled up.

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According to the Startup Ecosystem Rankings 2022 report, published by StartupBlink, a startup research center, Spain ranks 10th for venture capital in Europe.

The report uses a metric that takes into account the quantity and quality of operating companies, as well as the business environment.

Although Spain’s score of 14.48 is a far cry from the 52.56 points of startup-segment leader UK, Endeavor director Antonio Iglesias notes that these companies have grown rapidly in Spain in recent years. Cumulative investment in Spanish startups is on the rise, with more than $4 billion secured by 2021, according to a company report.

Pros and cons

Admittedly, the current gloomy international outlook may slow the pace of growth in the sector. However, Iglesias told Bloomberg Línea that he believes the total number of Spanish unicorns will double by the end of 2023. As of 2021, seven companies had reached valuations of $1 billion or more. And so far this year, three more achieved this milestone: Fever, Travelperk, and Factorial.

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“The tap is turning off globally, but not entirely. Although there is less money, resources will be directed to the most attractive opportunities in terms of costs and efficiencies,” said the Endeavor executive.

Proof that the tap is still open, despite the challenging macro scenario, was the $120 million raised last month by Barcelona-based Factorial. With this round, the startup, which develops software aimed at managing human resources platforms, became a unicorn. Also in July, Seedtag raised a 250-million-euro round.

Why Spain?

Iglesias argues this has to do with the human capital, combined with competitive prices compared to other European countries. This makes Spain a good candidate for venture capitalists’ resources, he says. In addition, the valuation bubble in the country is lower and many venture capital funds have to invest because they are loaded with capital.

“Spain is being looked at by investors from other countries because it is a good place for tests. It is a cheap, good-sized market and there is a change of mentality resulting from the success stories of the last few years,” Iglesias said. “Then there is another element: lifestyle. Because of its quality of life, Spain attracts a lot of talent from abroad.”

Christian Hense, co-founder of Universal DX, agrees with the fact that the climate and quality of life can be “a convincing factor” for digital nomads to move to Spain. The German company, which develops blood-based tests for the early detection of cancer, also moved to Spain because of the country’s renowned healthcare system and the “natural extension of a market of 40 to 45 million Spaniards to more than 350 million additional Spanish speakers in Central and South America”.

Another advantage of the Spanish market is that the country is diversified in terms of sectors and spread across several cities. “Unlike France and England, where entrepreneurship is very focused on a single city, here there are different hubs specializing in different areas: gaming in Valencia and Barcelona, healthtech in Barcelona, logistics and fintechs in Madrid, cybersecurity in Malaga. At a country level, everything is very diversified,” said the Endeavor executive.

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Iglesias also pointed to the recent approval of the Startups Law by the Spanish Congress, which, he says, “is a first step to ensure the retention of talent, attraction and investment” in the sector.

Passed three weeks ago and expected to come into force in January 2023, the law is now on its way to the Senate for final approval.

Among the main elements of the bill are the definition of a startup as a newly created emerging company (less than five years old or seven years old in the case of biotech and energy companies), and the provision of tax breaks, with corporate income tax to drop from 25% to 15% in the first year of profits, and a tax exemption for stock options of up to 50,000 euros (the previous limit was 12,000 euros), and which was a long-standing request of the sector.

It is estimated that the regulation will impact 11,100 startups in Spain, which ranks fourth in Europe in the number of this type of companies.

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Juan de Antonio, CEO and founder of Cabify, a startup that was born on Iberian soil and in a short time of operation has scaled up to land in seven Latin American countries, says that Spain has evolved a lot in the last 10 years.

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“When we started, in 2011, there was an underdeveloped ecosystem and the reality today is very different,” De Antonio said.

The challenges

However, even if the environment seems more favorable and receptive to startups, there are some challenges to overcome. Igor Tasic, who led the Startup Europe Week event for years and today leads a company called Meta Ventures, believes that heavy reliance on public resources affects the development of more innovative projects between companies and universities.

He says this “vice” related to public money can harm technology transfer in universities and even slow down the entrepreneurial drive. Moreover, Tasic says, these funds generally finance startup operations, but then many startups don’t get the resources they need to scale up.

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This analysis, that there is more support for the birth of companies rather than their growth, is echoed by Endeavor’s Iglesias.

“Companies don’t manage to scale up until they are between five or 10 years old,” he says, and for whom the “shortage of technical talent” in Spain is something that also needs to be addressed, as professionals from previous generations do not yet see working in the startup world as a natural career path.

“Technical and management expertise still does not dare to make the leap into this ecosystem, although there has already been improvement in this regard,” Iglesias says.

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For the Universal DX executive, which after raising $60 million is looking for more capital to finance its expansion, Spain could be even more competitive with the creation of tax incentives for investments in startups and innovative medium-sized companies. “I think some European countries or governments support their innovative ecosystems more proactively, such as the UK and Portugal,” he said.

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“Barna”, the most popular destination

The rivalry between the two main Spanish cities, Barcelona and the capital Madrid, goes beyond politics and soccer. The rivalry also extends to startups. Barcelona has extended its lead over Madrid as the most dynamic city in the country in terms of entrepreneurship and innovation.

In fact, the Catalonian capital is considered the third-favorite European city to launch a startup, behind Berlin and London, and ahead of Lisbon. Madrid ranks 10th, according to the Startup Heatmat Europe 2022 report, prepared by specialized consultancy Deep Ecosystems. The study is based on a sample of more than 24,000 startup founders, distributed across the continent, who gave their vote for the centers where they plan to start companies.

According to the study, this popularity has to do with the influx of venture capital in the city: in 2021, Barcelona startups together raised more than €2 billion for the first time - most of it raised by food delivery app Glovo, which alone raised a total of €1 billion.