Shortage of local investment drives tech startups out of Spain

Story by Alex Newman and Ethan Parets

MADRID–Several computer monitors and laptops are scattered about the office’s lone desk, used as a communal space for the company’s four employees. The walls are plastered with diagrams of web design, sticky-notes and the close-knit team’s inside jokes – including Arnold Schwarzenegger as Employee of the Month.

Among the tangle of wires and cables that keep the group charged and connected are Rubik’s Cubes, Legos and a 3D-printed Yoda figure. It could be the office of a young, hip, Silicon Valley startup – except that in Silicon Valley, there’s usually no problem shopping products and securing funding. In Spain, though, tech startups such as Samsamia have found themselves unable to close a deal in the country’s sparse venture capital market.

Miguel Gonz‡lez-Fierro, founder and CEO of Samsamia, demonstrating how Dresscovery, the application he designed, works.  Photo by Clara Cutbill

Miguel Gonz‡ález-Fierro, founder and CEO of Samsamia, demonstrating how Dresscovery, the application he designed, works.
Photo by Clara Cutbill

“We spent all of last year talking to the important players in Spain,” said Miguel González-Fierro, 30, co-founder and CEO of Samsamia, “but were turned down.”

Samsamia uses its Dresscovery application to determine where a fashion item is sold, tell the user how much it costs and offer similar garments by analyzing a photo taken and input by the user. The company has existed since 2012, but at the beginning of last year, González-Fierro and his colleagues quit their jobs in order to fully commit to furthering their vision. Searching for a local investor was the next step and would soon become the team’s biggest challenge when no Spanish firms would offer Samsamia financial support.

Frustrated and out of options in his home country, González-Fierro looked abroad for funding. He is in talks with investors in the United Kingdom, but no deal has been struck yet.

González-Fierro is not the only tech entrepreneur to seek assistance from foreign sources. Spain’s major venture capitalist firms have historically shied away from devoting funding to science and technology startups and have been especially tentative since the economic crisis in 2008. Not willing to take risks on these burgeoning startups in such a limited market, the country has stymied its most creative young minds, forcing their ideas and revenue out of Spain.

“We are about 20 years behind other countries,” said Juan López Santamaría, 33, investment manager of Kibo Ventures, a Madrid-based venture capitalist firm that invests solely in science and technology companies. “The first moves [in the tech field] were made in the early ‘90s.” In the United States, he noted, venture capital firms were investing heavily in new tech starting in the 1970s.

According to a report by the National Venture Capital Association, an American trade organization of venture capitalists, firms in the United States invested a total of $48.3 billion in startups in 2014, with $11.9 billion going toward Internet-specific companies and $19.8 billion earmarked for software companies.

By comparison, in 2014 Spanish VC firms invested a total of $359 million in technology startups at all stages of development, according to a report by Venture Watch, a website that reports on IT investment deals in Spain.

“Venture capital has lagged in continental Europe as opposed to the U.S.,” said Josh Lerner, professor of investment banking and head of the Entrepreneurial Management Unit at Harvard Business School.

Much of this is due to the market size. VC firms in Spain, with a population of 47 million people, have to cater to a global audience in order to sustain their investments, while firms in the United States can afford to market their investments on a national level, confident that these startups will thrive in the larger market.

“In Spain you need to have an international thought from the beginning and start addressing that as soon as possible,” said Santamaría.

With VC firms in Spain thinking globally, it has become hard for startups in their infancy to get the funding they need, often seeking a smaller amount of money to help them advance to the next stage of development. Samsamia was rejected by Kibo for this very reason, as they were seeking a $200,000 investment and Kibo is used to offering $1 million to $2 million, according to González-Fierro.

“Here in Spain they are used to companies who are ready to market,” said González-Fierro. “We are not the normal startup here in Spain. The market is not mature enough.”

The Universidad Carlos III de Madrid Science Park is an incubator that helps startups like Samsamia.  Photo by Clara Cutbill

The Science Park incubator at The Universidad Carlos III de Madrid helps startups such as Samsamia.
Photo by Clara Cutbill

At the business incubator in Universidad Carlos III’s Science Park, where Samsamia is headquartered, 24 technology firms are trying to close this gap with the rest of the world. The incubator, founded in 2002, works closely with tech startups to provide office space and researchers, assistance with networking, development of a business model and exposure to investors.

“Let’s say that the central argument is searching for funding,” said Emma Crespo, the incubator’s manager. “But when you go searching for funding, [investors] question everything.”

Crespo and the others working at the incubator help these budding companies, many of which are headed by CEOs with no business experience, learn how to present themselves to investors. The incubator not only works to groom tech startups for the next stages – it also serves to entice researchers and business owners to come back to Spain.

“I think there’s been sort of a brain drain, so in that sense it’s been costly,” Lerner said. “But, there are real benefits from places like India having expats return. The benefits are likely to be substantial in Spain as well.”

If the country can establish itself as a viable and lucrative environment for Spanish tech companies to flourish, it can convince its relocated minds to return. According to Crespo, this is potentially beneficial.

“We have young researchers leaving the country, but I don’t think that’s necessarily a bad thing,” Crespo said. “If they set up firms abroad and come back, then we have connections in other countries.”

But things are looking up, as Spain’s venture capital market aims to compete with other western powerhouses. From 2013 to 2014, Spanish firms’ total investment in IT increased by 30 percent and the number of deals closed increased by 14.5 percent.

“There seems to be a bit of global catch up in the past year or two,” said Lerner.

Companies such as Kibo Ventures, which was established two and a half years ago to capitalize on the absence of science and technology investors, are looking to stimulate this sector and revitalize the country’s IT field.

Juan Lopez is the investment manager at Kibo Ventures, a venture capitalist firm in Madrid.  Photo by Clara Cutbill

Juan López Santamaría is the investment manager at Kibo Ventures, a firm that funds startups in Madrid.
Photo by Clara Cutbill

“We believe it’s a sector that is going to have a huge growth,” Santamaría said. “It is a trend and it will grow.”

Kibo is invested in 30 startups, three of which are now owned by larger companies such as Groupon.

But despite their growing success, venture capitalist firms still risk alienating smaller startups such as Samsamia, and forcing them out of the country. They have not had enough success with technology businesses to trust that they will see a return, and have to bet high in order to tighten the gap between them and the rest of the world.

“The whole point of what we do is to help a company grow through various stages from a middle to a global level,” Santamaría said. “It doesn’t go with our strategy to invest a low amount of money.”

González-Fierro is hoping that this trend reverses, sooner rather than later. While he is still hunting for funding in the United Kingdom, he would rather streamline the process and keep all aspects of Samsamia in his home country. But for now, that’s not an option, he acknowledges from his cramped, shared space in the incubator.

“Once I get investors, I want to set up an office, right here in Madrid,” he said.

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