The Price of Maturity
Good events fill you up with leads, contacts, content… and great events make you feel empty as you struggle to cope with so much intensity in a very short time span, always leaving you with the sensation that you are missing something important. Such was the case for the South Summit which took place in Madrid Oct 3rd to 5th.
The South Summit has been hailed has South Europe’s main innovation and entrepreneurship event, and rightly so. Granted, Web Summit is a way bigger event — 10x ballpark — , but that counts as a Global event that was huge and famous before it relocated to Lisbon. Don’t get me wrong, the Web Summit has had an amazing positive effect on the Portuguese innovation environment and its startups, and I hope that many other events choose our beautiful locations to set shop and lift their international popularity. However, the South Summit is a genuinely Iberian event from its inception, and as such it is the right sandbox to test the maturity of South Europe’s entrepreneurial ecosystem.
Leaving behind the fireworks and glitter of the startup competition — such beauty pageants tend to negatively correlate with market success — , the scripted speeches of the government authorities —who have not given up yet the knee-jerk reaction of regulating innovation by decree — and the ultra-expensive ad campaigns by big consulting firms to convince us that elephants can dance — they can’t — , these indications of maturity are the most precious takeaway from the event, because they signal that we are reaching the point were Spanish startups can confidently compete in the global landscape.
The fierce activity in the pavilions is an effect of what the data carefully collected by María Benjumea, founder of the organizing entity Spain Startup, shows: 66% of Spanish startups survive their first year and, on average, the projects count on 2.3 years of runway, compared with just 1.87 in 2017. Moreover, 17% of them have positive EBITDA, compared to 14% just one year ago. With all indicators on the green there has been good progress on equality as well: 22% of the the startup founders are women, compared to only 18% in 2017. As much as we praise diversification in the markets we need to understand that founder diversity is a source of strength and we should be proud of these achievements.
Delving on that, I particularly enjoyed the “Making Corporate Venture Funds Work” panel that took place on October 4th at the Investor’s Den. It was great to listen to Jay Reinemann, partner at Propel Ventures, who has a long experience investing in Spain in his role as part of BBVA. Jay reflected on the high technical quality of the Spanish founders: they are great engineers and designers, superb product people. Also as entrepreneurs they tend to be more cautious due to the lack of capital, which Jay saw as a positive given the mistakes that founders often do under pressure when awash in funds at sky high valuations.
Vin Lingathoti from Cisco Investments expanded on that reminding the audience that valuations may be great in Spain but… what happens when you need to expand operations to, say, Europe? And then from Europe to Bay Area in California? That it is a bigger league and it is not granted that you are going to be successful at that game as well; making the move properly requires very particular experience, skills and resources that are not readily available to entrepreneurs. Vin painstakingly shared the case of two companies in the Cisco portfolio that, though very promising initially, are currently struggling with precisely that situation. However, it can be done, and he shared the success story of Spain’s AlienVault as an example.
Reaching this point, it is interesting to note that Jay and Vin’s perspective comes at odds with what the “conventional wisdom” of the Spanish investor is. Time and again at events in Madrid and Barcelona I have heard people complain about “crazy-high valuations”, “how expensive the market is today” and “the fact that we are in a bubble right now”. Who is right?
Let me draw a page from Eugene Fama’s efficient markets hypothesis and advance the thought that — besides some obvious heating up after a 10-year bullish stock run — Spain’s venture market is not expensive nor cheap, but rightly priced given its risk and return ratio. Of course that startup equity costs significantly more today than, say, 5 years ago… but you are not acquiring a comparable asset. You are buying into more professional founders, more solid projects and, what matters most, a much more mature support ecosystem that dramatically de-risks your investment.
Conversely, that is also why it is silly for Spanish startup founders to measure themselves up to their Israeli or North American competitors and cry “¡my product is way better and look at their valuations!”. You are not a comparable asset. Unless you have a viable strategy to become a global contender… shut up and suck it up.
It is hard to understate the importance of the support ecosystem to boost the success chances of a startup: if you are smart or lucky enough to catch the right tide, it will lift all the boats.
Let me give you an example: a few months back I had the opportunity to attend the first BeaverTank startup pitch session organized by MIT professor Bill Aulet. Ironically named after the now famous Shark Tank, it couldn’t be further from the harsh, dismissive style of the ABC show. Yes, there is direct, honest feedback to the entrepreneurs, but more importantly the BeaverTank is shaped around one question: how can I help you? The audience actively pitches in or follows up trying to contribute from different angles, be it with ideas, funding, contacts, leads… whatever may be of assistance to a fellow entrepreneur.
That is the power of a like-minded community that often gets overlooked in entrepreneurship studies and debates. Young entrepreneurs in Boston find themselves enveloped in an environment of collaboration, support and mentorship that is transformational.
Talking later with Bill he was right on point to mention that despite what the so-called valuation bubble in USA and the global ICO irrational exuberance may lead to believe, it is still very hard to get funding for a new project. Arguably, it is so by meritocratic design; the series of hardships to get investors on board are meant as kind of initiation rite that carries the aspiring founder into entrepreneurial adulthood.
What he did notice as well is that seed funds are pushing the risk to angel investors and moving upstream to avoid the high mortality rate that comes with early stage investments, and also that competition is forcing specialization in the industry; not only among firms but in terms of regional clusters as well. In that sense Silicon Valley has by far the most money available and is more willing to accept risk, hence taking the lead on low-IP winner-takes-all software projects, while New England is more closed, particularly good at harder tech like robotics, healthcare, energy and the like. Meanwhile other relevant clusters have emerged in New York for real estate, fintech and ad-tech, plus Austin mainly for digital media. We can expect a similar clusterization effect to take place in South Europe between Barcelona, Valencia, Madrid, Malaga, Lisbon and Porto as a byproduct of the maturing environment.
Regardless, Bill did not forget to restate that you can raise good rounds from all these places, so a commonality of vision with your investors is key, exemplified in “right partner first, valuation later”.
Going now back to our own situation in Spain with our level of maturity and our valuations… Is that the whole picture? Should we feel satisfied?
Not at all. I think that Joshua Siegel, General Partner at Rubicon Ventures in New York totally nailed the issue during his panel at the South Summit when, prompted by yet another begrudged investor complaining about valuations, exclaimed that the fundamental problem in Spain resides within the M&A market, not the valuations!
That is absolutely correct and supported by the data: compared to 12.24% for UK, 19.08% for Sweden or 17.81% for Germany, Spain only accounts to a 3.82% share of European M&A activity, which is absolutely dismal given its comparable KPIs. Besides IPOs — which are in an even worse status — mergers and acquisitions happen to be the main reward mechanism that provides us with liquidity to reinvest back into other startups. The absence of exits exerts an excruciating down pressure on the whole ecosystem, depressing expectations, valuations and teams alike.
Unfortunately there is no easy fix for this broken pipe. I completely share Joshua’s view that the right way forward for successful venture funds is to make less deals per partner and more direct support, working hand in hand with the entrepreneurs and, as he likes to phrase it, not getting into a startup if we don’t seriously believe that we can dramatically contribute to their MRR in the next 60 days post round. That is the vision we share at Conexo Ventures, and given the national M&A situation our way forward has been to become the masters at building an international path for the best South European innovation towards more advanced markets.
But here’s us hoping that Maria Benjumea’s great work in attracting national household brand names to the South Summit, under the umbrella of the Open Innovation concept, will spark corporate enlightened self-interest in buying versus building and thus accelerate the development of a deeply funded, widely participated M&A market in Spain.
Long term, we all will certainly benefit from that.
