Taking Stock
Once we are back from the Christmas break, leaving behind dinners, nougat desserts and gifts, it is the right time to take stock of the most relevant trends that developed last year, which has passed with its share of major convulsions and ups and downs.
Cry(pt)ogenization
I do not want to say much about the great deflation suffered by the cryptocurrencies worldwide, which closed the 2017 with astronomical returns and expectations of taking over the world, turned into an incredible social phenomenon. To the point that the Japanese group Virtual Currency Girls debuted in Tokyo on January 12, 2018. Wearing funny crypto-themed masks, the girls conquered the devout audience with songs like “The Moon, The Cryptocurrency … and Me”.
Unfortunately, the group could not have chosen a worse time to jump on the scene, and its success was as virtual as it was ephemeral. The collapse of Bitcoin and other leading currencies in January 2018 caused a snowball effect that has gradually engulfed the entire sector in an ice age style winter. It was a quite predictable irrational exuberance that we analyzed at the time and about which it is not worth spilling more ink, not even digital. Just to say that this situation we are experiencing is comparable to the collapse of the “Dot Com” market that began in September 2000 and developed with force from 2001 onwards.
Before, a startup could raise money simply by saying it was a “web company” and having a digital domain somewhere. Afterwards, there were no more “web companies” because … HTTP technologies were incorporated in a general way into the toolbox that entrepreneurs used to assemble their services with and the focus shifted to the right place: the value proposition to the client. It was a very painful tsunami, but also cathartic, and from it emerged large companies such as Google and Amazon. Likewise here the flood is taking away most of the cryptocurrencies, which were nothing more than ridiculous speculative distractions of what really matters.
Before, a startup could raise money simply by saying it was a “blockchain company” and having a “shitcoin” in some blockchain. Afterwards, the core innovation will join the toolbox and what the importance will shift to the business model. From this point as well will emerge large companies such as Coinbase and Securitize. In Spain we are well positioned in this sector, because of both the hard work of many talented entrepreneurs and the smart bets made by the big players in the banking sector, such as BBVA, which last November announced the world’s first syndicated loan through the Ethereum network, worth 150 million dollars, joining forces with BNP Paribas in France and Mitsubishi UFJ in Japan. It allowed the bank to reduce costs and speed up an archaic process that involves sending faxes — yes, dear millennial, they are still used — calls and so on, from about two weeks to only two hours. BBVA is also an investor in Coinbase via its external investment unit, Propel Ventures.
Spain Is Killing It In Ventures
Now on to the important stuff: Spain is killing it in ventures, and 2018 has been a record year for both entrepreneurship and investments. As much as we complain about our country — and we certainly do not lack reasons due to important systemic deficiencies — we must admit that we have excellent infrastructures, a good healthcare model and magnificent professional services (I’m not talking only about engineers but also managers, investors, advisors, etc) that cost between 3 and 5 times less than the European average. And should we need to bring foreign talent, we also have a reasonably fast process for obtaining visas compared to many of our neighbors.
José Zudaire, director of the Spanish Association of Private Equity, comments that the figures back us up and we are the only country in Europe that has four innovation hubs: Barcelona, Madrid, Valencia and Malaga, with a healthy competition between them to attract talent and startups. If we add to this the impressive entrepreneurial ecosystem that has been formed in Oporto and, above all, in Lisbon, we can proudly say that the best opportunities in Europe are in the Iberian Peninsula. What we lack is the usual; believing in ourselves, getting rid of the fateful dark legend, going out and succeeding. We need to get used to think big and consider international expansion as a strategic necessity, detached from both sentimentality and stereotypes. The linguistic familiarity with Latin America hides enormous differences in social structure and legal framework. The European Community conceals a tremendous fragmentation with respect to the USA and a great regional protectionism.
I think that Carlos Pierre, founder of the tremendously successful Badi in Barcelona, nails it when he says that this is unfortunately part of the national character: despite being a country with a great soccer tradition, we did not believe that we could be world champions until we actually were. The epic of “La Roja” became a catalyzer for a culture that recreates itself with ease in the failures and very quickly forgets the triumphs.
Yet Funding Remains Challenging
On the investment side we are already better than before the devastating crisis of 2008, reaching the record figure of around 5 billion invested in 55 operations. However, we still have a lot to do since our ratios are far from the rest of Europe. For example, the French with an economy twice as large as ours make triple the investment in startups: 15 billion compared to our 5. In this sense, GED Capital’s unique vision is combining specialized Venture Capital and Private Equity vehicles under the same roof, with the objective that the managers have a more complete vision of the market and can accompany the portfolio companies throughout different stages of maturity, an innovative value proposition that we hope the rest of the industry will adopt in years to come.
The current situation often forces entrepreneurs to juggle many balls in the air in order to obtain the necessary funds. An exemplary case is that of Sacha Michaud, founder of Glovo also in Barcelona. Glovo, competing with great brand names such as Uber, Deliveroo and even Amazon, managed to differentiate itself in a revolutionary way by turning upside down the traditional model of “delivery” — it is the consumer who asks for the service, so there is no need to reach individual agreements with the business and the business can be scaled at explosive speed. In spite of this, the fundraising process was extremely difficult and in order to maintain a sustained growth in 2016 they even had to make a personal loan to the company because the round did not arrive in time.
“It is necessary to manage the extreme uncertainty because the rounds fall apart even on the way to the notary”, says Carlota Pi, founder of HolaLuz; another phenomenal startup that already has 200 million in revenues and employs 170 people. It is thus not surprising that the motto of the experienced entrepreneurs is “be always raising”, get used to living in a permanent round, keeping potential investors always informed about your progress and trying to get a reputable fund as a lead investor, because many business angels and less professional investors prefer to stick to the Lemmings game and follow the group peacefully, sometimes towards a precipice.
On the other hand, although they recognize that it is not easy to take this route under pressure, something in which Carlota Pi and Carlos Pierre agree with insistence is that you always have to force yourself to choose, instead of merely accepting, an investor. Given the dilemma of welcoming someone you do not like into the company, better buckle up and keep looking because the consequence of a bad courtship is a terrible marriage that will end sooner or later in a painful divorce. In this sense, Carlos advises looking at the portfolio and talking with some founders to share the experience, and see what the investor can contribute beyond the money.
I particularly like how Carlota articulates her criteria when choosing investors, in descending priority order:
- Share the same vision and the same ambition.
- Be cristal clear that the client is above everything else. Or, as she likes to phrase it: “generating shareholder value gives me the creeps”.
- Having fun together. And here we laugh a plenty when we start sharing anecdotes of old and boring funds going through ridiculous loopholes trying to look cool.
Populism Drifts into Ludism
Finally I would like to make a brief but perhaps necessary reflection on the perception of the technological sector worldwide. Since I started in this industry in the 90s, startups have always had a positive vision in the eyes of the general public, because their entrepreneurs came with value propositions that, as Carlota says, put the client ahead and frequently dared to face the establishment with few resources but a lot of talent. Courageous stories of David against Goliath whose success was in the benefit of all.
But time goes by, and those startups of yesteryear have matured and in some cases replaced the establishment, becoming large corporations such as Facebook, Google, Apple or Amazon that can impose excessive control over their sectors, and public opinion is turning against the technology industry in general. In my experience, the year 2018 has been pivotal in this change of perception, from huge scandals like the Cambridge Analytics data ops in social networks and the working conditions at Amazon stores, to the fact — apparently harmless but a symptom of a bigger problem that Hollywood aptly channels as an expression the collective gestalt — that the villain of the blockbuster film Venom is quite the doppelgänger of Elon Musk, seeking to dominate humanity through technology.
No doubt monopolistic situations must be prosecuted and abuses corrected when it is proven to be the case. But citizens’ fear of change is also being used by certain groups and political forces to strengthen their positions of power. The conflict of the taxi sector with the new urban mobility competitors or the resistance of the unions to the introduction of more flexible work models that take into account the transnational nature of the labor market are good examples of this. In that sense, the wave of growing populism on both sides of the Atlantic (Trump, Brexit, Podemos …) is metastasizing in a raw protectionism that, in the end, is nothing more than a return to the Luddite view of life, slowing innovation in order to maintain the status quo.
The excuse of protecting the taxi sector precludes others from providing a better service to consumers, and the excuse of protecting the traditional employee makes it impossible to conceive a job offer that, for example, fits in with the pattern of “modern nomads” who do not want a fixed position in a specific city, but rather to travel around the world combining work and leisure in a flexible way. Sacha from Glovo is clear about it, “flexibility is a necessity” given that companies like his open the door to a hybrid work model. And here we are not only talking about messengers but also highly qualified workers for which other factors such as the level of empowerment (“how much is it really your job”) or the realization of personal goals matter much more than salary or stability in a job description.
This is a great debate on a world scale that is already provoking reactions (such as Macron’s attempts in France to merge the positions of freelancer and employee) and that will come to fruition, through many advances and setbacks, during the coming years. In this case I agree with Carlota when she states that “probably as always the execution will come first and then the legislation will follow”. That’s life.
