Legislation holds back VC investment in Spain

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From freestock.ca

Venture capital in Spain has, traditionally, been hard to come by. But that is changing.

Spanish firms attracted €209 million ($235 million) in VC investment in 2013 , down from €221 million ($248 million) in 2012 and €301 million ($338 million) in 2011, according to Web Capital Riesgo, an analyst. The number of deals has remained in the high 300s throughout, suggesting that VCs are less willing to take risks. But last year the figure was up to €320 million ($359 million), and Q1 this year has already seen €110 million ($123 million) laid down, suggesting a record year for the industry.

These are figures that underpin an economy that, while still reeling from the global financial crash, is improving. The IMF recently revised Spain’s growth forecast for the year up from 0.8% to 2%. That will slow to 1.8% in 2016, but the signs are that the hardest times are behind a country in which half of all young people are jobless.

Active Venture Partners, based in Barcelona, has pledged 80% of a $54 million fund to Spanish startups, while funds backed by major corporations such as Caixa Capital Risk (La Caixa Bank) and Kibo Ventures (Telefonica) have pumped increasing amounts into the local market. The Spanish government has leapt into the industry with FOND-ICO, a €2 billion ($2.24bn) fund to promote VCs investing domestically.

Kibo puts 2/3 of its money into Spain. Its founder Aquilino Peña claims to have witnessed an “immense change” in the past 18 months. Development costs are low compared to tech hubs like the U.K., he adds, and “lots more local capital” is coming in.

“In the ecosystem, VC numbers are the easiest to track and measure,” says Liz Fleming, VP international at Spain Startup. “What’s interesting about VC is that it doesn’t necessarily come from a recovering economy but the maturation of the ecosystem, and exits. We’ve had some big exits and VCs are waking up.”

Within the numbers some successful companies have been unearthed. Privalia is a discount fashion site that is big in Brazil. It has raised €200 million ($224 million) so far. Barcelona’s software firm Softonic has raised the same amount, while e-voter firm Sytel, security brand Alienvault and classifieds innovator Wallapop have been part of a general shift from copycat models to unique, Spanish ventures.

Spain also ranks highly in renewable energy, being the world’s fourth-largest producer of wind power, at a capacity of 22,987 Megawatts, and the sixth-biggest producer of solar power. Yet even this bright sector was hit hard by the Eurozone crisis, when Spain’s government pushed back on subsidy promises and scared away investment.

Emerging from this field, Vortex Blameless aims to shift the tide. Its wobbling turbines create whirlpools of air that are converted into power by a generator. Its creator David Yanez claims that the product will be 40% cheaper than a conventional wind turbine, require fewer foundation building and save the lives of hundreds of thousands of birds per year. The company has already far excelled an Indiegogo drive aimed at a pilot scheme in India, and is reported to be close to a $5 million funding injection from the U.S., to add to $1.1 million already raised.

Iñaki Arrola, founder and director of Madrid’s upstart VC Vitamina K, is quick to assert the capital and Barcelona’s stranglehold on Spanish tech, claiming: “things are growing nicely – it’s a great moment to invest in Spain.”

But Arrola, and most other Spanish experts, bemoan legislation that appears out of step with the rest of Europe. A blanket tax on stock options, brought in to stop top-level executives draining stocks from their firms, “defeats the purpose of having a stock option,” says Peña. “It’s not helpful.”

An exit tax, also aimed at larger firms attempting to decamp abroad, but affecting SMEs and startups alike, is also too clunky and stops companies scaling as quickly. “The exit tax was not planned for the tech community, but it has had a huge implication on us,” says Peña.

“If you want to relocate an HQ from Spain to anywhere else it’s very tough,” adds Fleming. “For big companies ok, but for startups it’s ridiculous.”

Some changes, such as a two-year-old entrepreneurship law that allows limited liability for shareholders, has helped. But it is limited to €50,000 ($56,000) – far less than the U.K.’s €150,000 ($168,000) – a discrepancy Fleming sees as symptomatic of legislation that is, in general, “a nightmare. It’s been one step forward, two back. We’re very backward compared to northern Europe.”

This December could see a shift, albeit one few entrepreneurs will relish. A general election is due to be held on the 20th, with far-left party Podemos aiming to capitalize on the successes of Syriza in fellow economic struggler Greece. That worries Fleming, who claims the party’s ten-step economic program “looks like it has been written by someone who doesn’t know anything about entrepreneurship.

“What we want are hundreds of million dollar exits, where we create role models so kids want to be entrepreneurs,” she adds. “So if we’re prohibiting entrepreneurs from gaining that amount of risk, we’re inhibiting entrepreneurship from the off. You’re putting a cap on the ambition of them.”

“Podemos is really far from the tech crowd,” adds Peña. “In terms of bringing good proposals they have said they want to build a network of sites for people to build businesses, which is fine, but it’s the same for any business.”

Peña believes that Spain has to change its opinions towards business in general, if huge improvements are to be made to the country’s legislation and digital economy. “It’s slowly changing,” he says. “Here in Spain it’s not a pro-business environment, and people who are successful are always thought of as corrupt. We still need to be much more pro-business, and not think that entrepreneurs are people who are trying to get money and screw the workers.”

Those attitudes are even embedded in the language: there is no Spanish word for ‘entrepreneur’, notes Fleming: “People here just say ‘startups’. So distinguishing between SMEs and startups [is a challenge] that has only just been hurdled.” Venture capital, too, is known locally as ‘capital de riesgo’ (capital risk), “which doesn’t help!” When these attitudes, and the laws they have spawned, can change, Spain has a vibrant tech community waiting to capitalize.